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After years of litigation, federal judges have begun to issue decisions on liability or damages in more than a dozen individual Winstar lawsuits brought by the owners of savings and loan institutions against the federal government. These include a ruling in one case last month awarding $381 million to the owners of Glendale Federal Bank and, in a separate case, a finding of government liability in the collapse of Philadelphia’s multibillion-dollar Meritor Savings Bank. Despite the flurry of activity, the litigation is only marginally closer to completion. Plaintiffs’ attorneys say the litigation has been stalled because the government is not trying to settle any of the cases and is appealing every adverse ruling, no matter how small. The suits are being defended by the commercial litigation branch of the Civil Division of the U.S. Justice Department. These lawyers, says Charles Cooper of Washington, D.C.’s Cooper & Kirk, are conducting a “scorched earth” defense. “Justice’s main technique is to relitigate every issue,” he says. “They never accept an adverse ruling.” The government, Cooper says, “files petitions for rehearing on virtually every issue it loses. The government even opposes motions to withdraw filed by law firms.” Beyond this, “the government is unwilling to settle at any price,” says Daniel J. Goldberg of the Washington office of Kutak Rock. “If you offer to settle for $100,000, they’ll say no. They’d rather litigate.” As a result of the dim prospects for settlement and the certainty of protracted litigation, says Goldberg, several smaller banks have dismissed their suits, despite the merits of their claims. “The government has spent them out of this litigation,” he says. “The bottom line is that unless you have a significant claim it would cost too much. How can you recommend that a client spend $3 million to get $2 million?” BEHIND ‘WINSTAR’ In the Winstar or “goodwill” litigation, the plaintiff savings banks and bank shareholders are charging that a policy switch by the federal government caused the worth of these banks to plummet. The plaintiffs claim that the government encouraged healthy thrifts to take over ailing S&Ls, allowing these thrifts to carry liabilities incurred on their books as goodwill assets. The goodwill assets would be counted toward regulatory capital requirements. When Congress passed the 1989 Financial Institutions Reform, Recovery and Enforcement Act, goodwill assets were barred from being included as part of a thrift’s minimum capital requirements. This sent many thrifts into insolvency and receivership; others survived but sustained massive losses. The plaintiff thrifts contended, and the Supreme Court agreed in 1996, that this was a violation of the “takings” clause in the U.S. Constitution. U.S. v. Winstar Corp., No. 95-865. “After the Supreme Court decision in 1996, we thought this would be resolved fairly soon,” says Christie Flanagan, general counsel of Golden State Bancorp, parent of Glendale Federal and California Federal Bank, which has a separate goodwill claim. After the decision, however, there were no settlement discussions, he says. “The government fought everything.” In the claim by Cal Fed, “it took us five more years and God knows how many millions of dollars before we had a judgment on liability.” “The liability is so clear,” says Thomas Buchanan of Washington, D.C.’s Winston & Strawn, who represents plaintiffs in the Meritor action. “But they keep reasserting these same legal arguments over and over again. The government says there was no contract, that the people who negotiated the contracts didn’t have the authority or power.” Each of these arguments was asserted and lost in Winstar, he says, but each argument appears again in liability trials for the other claimants. The Justice Department confirms that there have been few settlements lately, or ever. Of the 122 cases originally filed, only six have been settled; 19 others were voluntarily dismissed by the plaintiffs. The last settlement in any Winstar case occurred in late 1999 on the eve of trial, says Charles Miller, spokesman for the Civil Division of the U.S. Justice Department. “We paid $1 million. They were seeking $280 million.” Overall, in the cases that were settled, says Miller, the plaintiffs were seeking $1.3 billion; the government paid $104.3 million. But Justice Department lawyers deny the charges that the defense has been overly obstructive, or that the government is delaying the litigation in order to force capitulation. “The cases are moving slowly,” agrees a senior official in the commercial litigation branch. “But there are a lot of them and they’re very complex. We have almost never sought extensions of time, but the plaintiffs have repeatedly done so.” The original estimates of total claims topped $30 billion, he notes. “These banks were looking for $2 billion here, $1 billion there.” But, as a result of the defense, he says, “the courts have not been awarding those numbers.” In the settlements and judgments so far, he says, “they’re getting literally pennies on the dollar so it’s hard to fault what we’ve been doing.” The judges involved, however, have been critical of defense tactics, says Vincent J. Colatriano of Cooper & Kirk. “Several Court of Federal Claims judges have taken the government’s lawyers to task for their refusal to yield on issues they had already litigated and lost and for their persistence in raising meritless arguments.” In a July decision on Landmark Land Co. v. United States, for example, Judge Robert Hodges contended that the government counterclaims “had no reasonable basis in law or fact.” In another July decision, involving First Federal Savings Bank of Hegewisch, Judge Bohdan Futey found that some of the government’s liability arguments were “expressly rejected” by the Supreme Court in Winstar or by the Federal Circuit. In the most recent Winstar decision, a Sept. 5 ruling on Tennessee’s Franklin Federal Savings Bank by Claims Judge Thomas J. Lydon, the court granted summary judgment for the bank on liability and called the government’s motion to dismiss “frivolous.” In 1997, notes Buchanan, when Loren Smith was chief judge, he indicated that if the government attempted to relitigate liability issues that had already been determined by Winstar, “he would sanction them and issue a summary judgment on the rest” of the pending cases. “But he never went forward on that.” As the ensuing cases reached the trial court, “the government brought back all the same arguments.” RULINGS AT A ‘TRICKLE’ An increasing number of cases are now coming to trial or have just reached a decision on damages or liability. “It’s been a slow, slow process but decisions are trickling out now,” Cooper notes. U.S. Claims Judge Loren Smith issued his liability finding on Meritor on Aug. 14. A retrial of the damages phase of the Cal Fed claim began on Sept. 4. The trial on the damage claim by Home Savings Bank, which is seeking $140 million, is scheduled to begin in October. Golden State’s retrial on damages resulted in a $381 million award on Aug. 2. Glendale Federal Bank v. U.S., No. 90-772C. The Meritor case may ultimately draw one of the largest judgments, says Meritor bondholder Gary Hindes. “Meritor was the oldest thrift in the country. At the time of the breach [of contract], it had $17 billion in assets. We think damages could be as high as $1 billion.” In the Meritor case, the fact pattern was slightly different, but the conclusion was the same as in the other goodwill cases. Claims Judge Smith found that the promise to Meritor’s owners was broken through passage of the Federal Deposit Insurance Corporation Improvement Act, which, like FIRREA, barred the use of goodwill assets. Slattery v. U.S., No. 93-280C. The damages awarded will be far less than sought, says Buchanan. Typically, the courts are not rubber-stamping the plaintiffs’ claims. Some of the awards have been particularly low. Benjamin Franklin Savings received about $35 million in its goodwill claim; the plaintiffs were seeking more than $900 million. The plaintiffs have filed a motion to reconsider to increase the damages amount, Buchanan notes. In the Glendale Federal case, the award — $381 million — was substantial. But Golden State was seeking nearly $900 million. In the first trial on damages, in 1999, the award had been $909 million. That judgment had been reversed by the Federal Circuit, for a new determination on damages. While the new award is far less than the original or the claim, the bank has not yet decided if it will appeal, says Flanagan. Even if the bank accepts the amount, he says, the case won’t be over. “We expect the government will appeal.”

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