ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Tuesday, July 2, 1996 TAG: 9607020049
SECTION: BUSINESS PAGE: B-6 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Associated Press
The Supreme Court ruled Monday the government can be sued by savings and loans that plunged into financial trouble when Congress changed accounting rules. The decision could cost taxpayers $10 billion or more.
The ruling could affect a pending lawsuit by Virginia's former Charter Federal Savings Bank.
On the last day of its 1995-96 term, the court said the government broke its contracts with three S&Ls it had encouraged to take over other, weaker institutions. The three were forced into the red themselves when Congress in 1989 changed the way thrifts must count their assets.
The Clinton administration had said a ruling for the S&Ls could cost the government $10 billion in damages in about 100 similar cases. Analyst Claire Fleming of the investment banking firm Friedman, Billings, Ramsey said the cost could go as high as $20 billion.
Writing the court's main opinion, Justice David H. Souter said that the contract terms ``are enforceable and that the government is therefore liable in damages for breach.''
Souter said ``it would, indeed, have been madness'' for the three S&Ls to have agreed to take over ailing thrifts without a binding promise that they could rely on accounting rules then in effect.
Stephen Bokat of the U.S. Chamber of Commerce said the ruling means, ``If you breach a contract you've got to pay damages, whether you're the government or a private party.''
The ruling upholds a federal appeals court decision that said the government breached its contracts with the three thrifts. The case now returns to a lower court to determine the amount of damages they are owed.
Stephen J. Trafton, chairman of California-based Glendale Federal Bank, one of the thrifts involved in the case, said a hearing on damages could begin by November.
``In breaking its promise, the government nearly destroyed this bank,'' Trafton added.
At issue was a 1989 law that sought to restore the troubled thrift industry to health by tightening rules and providing money to close insolvent S&Ls. Overall, the S&L cleanup has cost about $200 billion.
Until then, the government had encouraged healthy thrifts to take over insolvent ones by letting them count the insolvent S&Ls' losses as ``goodwill'' assets. S&Ls also were allowed to double-count as ``capital credit'' government funds provided to help them take over ailing thrifts.
But the 1989 law said S&Ls no longer could count such intangible assets toward their minimum capital requirements.
The rule change forced many previously healthy S&Ls into the red.
Many of them sued, including Winstar Corp. of Minnesota, Statesman Savings Holding Group of Iowa and Glendale Federal Bank.
Each had taken over troubled thrifts and was allowed to count millions of dollars as goodwill assets to be written off over at least 25 years - $716 million for Glendale, $9.1 million for Winstar and $26 million for Statesman. Statesman also counted $26 million in capital credit.
After the 1989 law barred those amounts from being counted, Winstar and Statesman were forced into receivership. Glendale had to raise about $450 million to meet its minimum capital to remain in business.
The Court of Federal Claims ruled that the government breached its contracts with the three, and the U.S. Court of Appeals for the Federal Circuit agreed. The Supreme Court affirmed.
The decision also affects the former Charter Federal Savings Bank of Bristol, which was acquired last year by First American Federal Savings Bank of Nashville, Tenn. Charter had acquired goodwill when it took over a series of ailing Virginia thrifts, but it subsequently sold stock and wrote off the asset from its books.
That write-off makes the Charter case slightly different from those decided by the Supreme Court.
Mary Neil Price, counsel for First American, said the decision is "clearly a positive development," although it's "too early to tell what the actual effect will be."
She said First American's suit against the federal government, like other similar cases, had been stayed in the U.S. Court of Claims in Washington pending the Supreme Court decision.
Price said that legal stay now will be lifted and the First American case will be heard by the Court of Claims.
In the acquisition agreement for Charter, First American said it would split any judgement 50-50 with the shareholders of former Charter.
Souter called ``fundamentally implausible'' the government's argument that it did not promise to allow the S&Ls to count the assets in the future.
If that were so, Souter said, ``the very existence of [the S&Ls] would then have been in jeopardy from the moment their agreements were signed.''
His opinion was joined by Justices John Paul Stevens and Stephen G. Breyer and in part by Justice Sandra Day O'Connor. Justices Antonin Scalia, Anthony M. Kennedy and Clarence Thomas agreed with the court's judgment, but for different reasons.
Chief Justice William H. Rehnquist and Justice Ruth Bader Ginsburg dissented. Writing for the two, Rehnquist said he disagreed with Souter's opinion, which he said ``works sweeping changes in two related areas of the law dealing with government contracts.''
Staff writer Mag Poff contributed to this story.
LENGTH: Long : 101 lines ILLUSTRATION: PHOTO: AP. Reporters get copies of the Supreme Court rulingby CNBMonday that lets savings-and-loan institutions sue the federal
government in a move that could mean billions of dollars for
existing thrifts. color.