Court limits U.S. authority to sue thrift advisers

June 14, 1994|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- The Supreme Court significantly narrowed yesterday the federal government's power to collect damages from lawyers and accountants who gave faulty advice that helped lead thrift institutions into financial trouble.

In a ruling that the Federal Deposit Insurance Corp. had warned would threaten federal claims of negligence totaling $1.5 billion, the court unanimously ruled that the FDIC -- after taking over a failed thrift -- does not have authority under federal law to sue thrift advisers for negligent professional advice.

If the FDIC has that right to sue, it exists only where a state will allow it, the court said in a ruling written by Justice Antonin Scalia. The decision rejected a claim by the FDIC that federal, not state, law controlled negligence claims aimed at the outside advisers of failed thrifts.

The court thus sent back to lower federal courts a test case on an FDIC negligence claim against a major Los Angeles-based law firm, O'Melveny & Myers. The court told the lower courts to decide whether California law allows those claims.

The FDIC said in a statement that "we believe the law in California, as in most states, will result in a recovery for the FDIC for the malpractice alleged in that case."

The agency also noted that the court had said that Congress remains free to give the FDIC added authority to sue thrifts' professional advisers, and that Congress is considering a proposal to make sure that the FDIC and the Resolution Trust Corp. can recoup money from officers and directors for negligence.

The FDIC had argued in the O'Melveny & Myers case that, independent of any state's law, the agency is free to pursue negligence claims when it takes over as receiver of a troubled financial institution. It must have that power, the agency said, to be able to protect the federal deposit insurance fund from depletion when thrifts fail.

In another unanimous ruling, the court cut back sharply yesterday on the legal duty of shipowners to inspect their vessels for unsafe conditions that might exist in their cargo holds.

Applying a 1972 amendment to the longshore-worker law, the court said that vessel owners are responsible only for actual unsafe conditions that the owners themselves know about. Otherwise, the court said, it is up to the cargo-loading, or stevedoring, company to make sure that the conditions in the cargo holds are safe for workers.

The court told lower federal courts to reconsider a claim by a Philadelphia dock worker who was hurt in 1989 while unloading bags of cocoa beans.

In a third ruling yesterday, also decided by a 9-0 vote, the court said that state officials must enforce the labor rights that state law gives to workers without discriminating against workers whose on-the-job rights generally are defined by a union contract.

Ruling in a case of a California grocery clerk who had a right under state law to collect her severance pay immediately, the court said that federal labor law requires states to let unionized workers take as much benefit of state law protections as nonunionized workers can.

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