Government held liable for S&L rule damages

September 01, 1995|By New York Times News Service

WASHINGTON -- In a ruling that could mean billions of dollars for the savings and loan industry, a federal appeals court said yesterday that the government is liable for damages for abruptly changing the rules by which S&Ls were allowed to calculate their assets when they took over weaker institutions.

The 9-2 ruling by the U.S. Court of Appeals for the Federal Circuit was eagerly awaited by the S&Ls, which had filed nearly 90 court claims charging that the government breached its contracts with them.

Industry analysts estimate the claims could total $10 billion to $20 billion.

The case, which directly involved the Glendale Federal Bank in California focused on the government's response to the problems of savings and loan institutions in the 1980s.

In the early 1980s, federal regulators had attempted to keep the industry afloat by encouraging financially healthy institutions to acquire failing ones. To do so, the government approved a set of arcane accounting procedures that provided an incentive for strong institutions to take over weak ones, including allowing an S&L to recognize the losses of the weaker institution as an intangible asset and to amortize the losses over 40 years.

Under those rules, Glendale in 1981 acquired a Florida S&L with losses of about $734 million.

But in 1989, Congress, facing a full-blown crisis in the industry, changed that rule, leaving Glendale and dozens of other S&Ls with oceans of lost capital and difficulty in satisfying regulators about their financial health.

In its opinion, the Federal Circuit, which reviews certain cases involving financial claims against the government, ruled that Congress could indeed change the rules. But the majority opinion, written by Chief Judge Glenn L. Archer Jr., said that, although the government might do so, it was breaking a contract and must pay damages to any savings and loan that suffered a loss by relying on the old rules.

"Although the government was free to legislate, it remains liable for breach of contract where its legislation is directed at repudiating prior contractual agreements," the court said in its opinion.

Shortly after the ruling, the stocks of several large savings and loan institutions surged in various markets.

There was even a rise in the price of an exotic security -- an investment issued by the California Federal Bank that would give its shareholders 25 percent of any cash award it might receive in its lawsuit against the federal government.

Justice Department officials said last night that they were studying the opinion and would have no comment on whether they would appeal to the Supreme Court.

If the department does not appeal, or if it ultimately loses in the Supreme Court, the U.S. Court of Claims will have to consider damage claims by the many savings and loans associations that relied on the government's earlier rules.

William Fulwider, a spokesman for the Office of Thrift Supervision, said there were about 89 cases backed up in the claims courts.

Richard Fink, senior executive vice president of the Glendale Federal Bank, said his institution believed it lost about $1.5 billion because of the law change.

Mr. Fink said that when the law was passed, his company was the fourth largest savings and loan association in the nation. But, he said, difficulties caused by the government's decision to change the standards had caused its status to drop, although it remains among the nation's top 10.

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