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Washington�In 1996, when the U.S. Supreme Court issued its landmark ruling in United States v. Winstar, plaintiffs’ lawyers thought the decision would clear the path for savings and loans, and investors, to recover tens of billions of dollars from the federal government. The high court found the government liable for breaking contracts with savings and loan associations as regulators tried to avert the 1980s S&L fiasco. But so far, actual damage awards have fallen far short of what everyone-even the government-anticipated. In total, 55 of the original 122 Winstar-related suits have been resolved without the government paying any money whatsoever. And in those cases where judges have ordered monetary awards, plaintiffs have recovered just a small fraction of their claims. “When the Supreme Court ruled, we thought it was just a matter of time,” said H.C. “Buster” Bailey Jr., former president and chief executive officer of Security Savings and Loan Association in Jackson, Miss., and lead plaintiff in one Winstar-related suit. Bailey, 64, was among those in the courtroom for the arguments in Winstar. In August, after nearly 15 years of litigation, the U.S. Court of Appeals for the Federal Circuit dismissed his claim. The court found that while the government had breached contracts with Bailey, causing the family-owned business to go into federal receivership in 1992, no damages could be paid because the costs incurred by the federal government in the seizure exceeded the company’s value-an estimated $44 million. ‘Piecemeal nullification’ Now Bailey’s legal team-led by Harvard Law School Professor Laurence H. Tribe and prominent Washington attorney Charles Cooper-is seeking Supreme Court review of the Federal Circuit decision, which Tribe and Cooper argue “makes a mockery” of the 1996 Winstar ruling. “The Federal Circuit is engaged in a gradual piecemeal nullification of Winstar, and the Bailey case is the coup de grace,” said Cooper, a partner at Cooper & Kirk who argued and won the Winstar case in the Supreme Court. Department of Justice (DOJ) officials declined to comment on the Winstar litigation or on Bailey’s case. However, current and former DOJ lawyers say the outcome so far has been positive for the government, which faced potential liability of more than $30 billion. “People thought the government was going to be out billions of dollars to the point it would affect the treasury and balloon the federal deficit,” said a former DOJ official who worked on Winstar matters. “My impression is that DOJ has done a heroic job in restricting liability and probably saved U.S. taxpayers billions of dollars.” To date, trial judges on the U.S. Court of Federal Claims have awarded plaintiffs about $1 billion, according to DOJ figures. Of that, only $22.4 million has been paid out. The rest-$988.8 million-continues to be litigated on appeal. Even if allowed to stand, the sum would represent just more than 5% of the amount claimed by plaintiffs in those cases. DOJ has also settled eight cases-with a potential value of $1.6 billion-for just more than $100 million. “The damage awards have been very disappointing, certainly in comparison with expectations,” said Jerry Stouck, a partner at Washington’s Spriggs & Hollingsworth and a leader in the Winstar bar. “Once the Supreme Court decided in favor of the test cases, plaintiffs assumed all these cases were winners.” Roughly 40 Winstar cases still await trial. But other plaintiffs, facing mounting legal bills and dimming prospects for recovery, have found the cost-benefit analysis just doesn’t compute. According to DOJ, a dozen Winstar plaintiffs withdrew suits in 2003. “The fact is, it costs money to litigate,” said Steven Rosenthal, a partner in the D.C. office of New York-based Kaye Scholer. Rosenthal, who practiced with Cooper from 1998 to 2001, has been litigating Winstar cases since 1991. “Even if you thought you were in the right, you might think about spending half a million in legal fees to collect a million,” he said. There is no way to know how much private plaintiffs have poured into litigating claims. About 35 law firms currently represent Winstar clients, down from 60 in the late 1990s. Among those with a stake in the litigation are Gibson, Dunn & Crutcher of Los Angeles; Arnold & Porter of Washington; Kirkland & Ellis of Chicago; and Jones Day. In 1998, the Justice Department estimated that it would spend more than $200 million litigating Winstar matters between 1999 and 2003. (DOJ could not provide actual costs.) At one point, DOJ had more than 50 lawyers working on the cases. Currently, 36 Civil Division lawyers spend most of their time on Winstar litigation-nearly twice as many as work in the Office of the Solicitor General. Cooper said he had two clients recently call it quits-one dropping its suit completely and the other settling for nominal damages. “We’re now 15 years from the time the breach took place, and we’re still grinding it out in litigation on liability issues,” he said. “How long can individual investors sustain that type of commitment?” Stuart Schiffer, head of the DOJ Commercial Litigation Branch, has disputed charges that the department has used scorched-earth litigation tactics or sought to delay trials. “In some cases, the government has conceded liability, and, in most, the courts have agreed with our defenses, holding that the government is not liable at all or is liable for only pennies on the dollar of the plaintiffs’ grossly inflated claims,” Schiffer wrote in a September letter to the Los Angeles Times. Cooper concedes that not every case should have resulted in damages. “But I know there are cases that should have come out in favor of the plaintiff, which were resolved simply because the plaintiff was drained of the ability and desire to continue,” he said. Bailey estimates he has personally spent more than $1 million on legal fees and litigation expenses since 1989. In addition to Cooper and Tribe, Bailey is represented by lawyers at Atlanta’s Alston & Bird and Jackson’s Forman Perry Watkins Krutz & Tardy. “I will not be saying goodbye to this case as long as I have any chance of a claim,” Bailey vowed, joking that his wife wishes he had said goodbye long ago. “It’s just not right what happened.” Family bankers Bailey’s father got into the banking and mortgage loan business in 1930, and for the next six decades the family business-which came to be called Security Savings and Loan Association-thrived. In the 1980s, as the federal government scrambled to stave off a looming savings and loan crisis, regulators repeatedly urged Security Savings, which it considered healthy, to acquire failing thrifts, thereby taking them off the government’s hands. As incentive, the government allowed the institution to count certain intangible assets-such as good will-toward capital reserve requirements mandated by federal regulation. By 1989, when Congress adopted the Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA, Security Savings had accumulated roughly $20 million of intangible assets. After the passage of FIRREA, the rules for calculating savings and loans’ required reserves grew more stringent, and the value of intangible assets like good will could no longer be counted toward required reserves. Security Savings, along with dozens of other thrifts that had cut similar deals with the government, suddenly came up short. “The news came to us in December [1989] that we were out of capital compliance and had to invest an additional $20 million in the business,” Bailey recalled. “We thought it was just a matter of time until we could explain to someone high enough up the ladder that this had all happened because of them.” On Oct. 16, 1992, after nearly three years of litigation in Mississippi’s federal courts, Bailey met with federal receivers to hand over his family’s business. From there, his case moved to the U.S. Court of Federal Claims-the only court empowered to award damages against the federal treasury in contract cases. The case was stayed pending a Supreme Court ruling in Winstar. Following the high court’s decision, Bailey’s case passed to Loren Smith, then claims court chief judge, for a liability determination. Smith consolidated Bailey’s case with a related claim brought by the Federal Deposit Insurance Corp. (FDIC) involving Security Savings and found the government liable for breach of contract. The case was then assigned to Judge Edward Damich for a ruling on damages. Damich-who became chief judge in 2002-rejected Bailey’s claims, which ranged from $44 million to $140 million. He held that Bailey could not recover damages at all, because the government’s own loss as the insurer of Security Savings deposits trumped any amount owed to Bailey by the government. The opinion stated that any damages awarded to the estate of Security Savings would have to flow first to the FDIC and second to private investors like Bailey. Since the FDIC’s claim of $66 million exceeded Security Savings’ estimated 1989 value of $44 million, any money awarded to Bailey would wind up passing from the government through the private investors and back to the government. The court dismissed the case as nonjusticiable. In their certiorari petition, filed on Jan. 26, Bailey’s lawyers call the decision “myopic” and a “stunning exercise of fuzzy math.” “It is more than passing strange that the government must pay damages in cases where its breach of contract only maimed, but did not kill, its contracting partner, and yet avoids liability entirely in cases where its actions led to a total loss,” the brief states. “At bottom, the courts below permitted the government to avoid liability by seizing its contractual partner.” The Justice Department has not yet filed a response to the petition. According to Cooper, roughly 46 Winstar cases involve “dead thrifts” like Security Savings, which were taken over by the government after passage of FIRREA. “I believe this case gravely prejudices the interests of all seized thrifts,” Cooper said. “It clearly deprives them of any prospect of being made whole or receiving significant damages.”

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