Golden State Bancorp Will Pursue Damages Against Government in Supervisory Goodwill Case After U.S. Court of Appeals Ruling
SAN FRANCISCO--(BUSINESS WIRE)--Feb. 19, 2001--Golden State Bancorp (NYSE:GSB), parent of California Federal Bank (Cal Fed), the successor by merger to Glendale Federal Bank (Glendale), today said it would continue to pursue vigorously its case for damages against the federal government following a decision by the U.S. Court of Appeals for the Federal Circuit. In its decision, the Court rejected parts of an appeal by the government but vacated a trial court's award of damages, sending the case back to the trial court for a new determination of damages using a standard set by the appellate court.
At issue in the case is the government's liability for damages arising from a 1989 repudiation of an earlier policy of allowing thrift institutions to count supervisory goodwill as an asset for purposes of meeting regulatory capital requirements. In the 1980s, the government permitted thrifts to include supervisory goodwill to induce stronger institutions to merge with weak or failing thrifts. In 1996, the Supreme Court found the government liable for damages as a result of the 1989 change.
Christie S. Flanagan, group executive vice president and general counsel of Golden State Bancorp, said, "We are pleased that the Court of Appeals rejected the government's argument and reaffirmed that the promise breached by the government in 1989 had substantial value and that Glendale should be compensated for its losses. The Court also stated that it is in the government's interest to settle equitably and fairly all of the cases affected by the U.S. Supreme Court's 1996 finding of government liability, so that the cost to the taxpayers can be determined without further delay."
Flanagan continued, "Of course, we are disappointed that the Court set aside the trial court's award because of the manner of determining compensation to Glendale. We intend to continue this fight until Glendale has been justly compensated for the substantial value of the breach of contract, and we believe that the standard for compensation set by the Court of Appeals will enable us to achieve that goal."
The Court of Appeals ruling came late Friday (Feb. 16) on appeals from the 1999 decision by the Court of Federal Claims, which awarded Glendale damages of $908.9 million. The appellate court upheld the trial court's rejection of a number of the government's arguments but vacated the damage award and sent the case back to the Claims Court on the grounds that one of two methods used to determine the amount of the award was flawed.
The Claims Court based its award on two theories, restitution and reliance. Under restitution, it assessed damages for the benefits to the government of the contract with Glendale that the government later breached. Under reliance, it assessed damages for losses sustained by Glendale in relying on the contract with the government. However, to avoid duplication with damages granted under restitution, the trial court limited reliance damages to losses sustained after the government's breach of contract.
The Court of Appeals vacated the trial court's damage award on restitution, saying it was "speculative" to try to establish the benefits reaped by the government. At the same time, the Court said, "this does not mean that Glendale is without a remedy" and remanded the matter to the trial court "for a determination of total reliance damages." The Court said it did not wish to undertake a piecemeal review of the specific items making up the trial court's reliance damages but preferred to wait to review those items as part of a final award by the trial court based solely on the reliance damage theory.
"[F]or purposes of measuring the losses sustained by Glendale as a result of the Government's breach, reliance damages provide a firmer and more rational basis," the Court said. It concluded that
"[r]eliance damages will permit a more finely tuned calculation of the actual losses sustained by [Glendale] as a result of the Government's breach."
The Court noted that reliance damages need not be limited to post-breach damages, as the trial court did to avoid duplication.
"[T]here is nothing inherent in the concept to prevent a court from awarding reliance damages for pre-breach activities from which ascertainable losses as a result of the breach can be shown."
The decision comes more than 11years after the government broke its promises to the former Glendale Federal Bank, which was acquired by Cal Fed in 1998. Glendale Federal Bank, Cal Fed and more than 100 other litigants initiated lawsuits against the federal government in the early 1990s, charging that the government breached contracts it made with savings and loans during the 1980s that encouraged companies to take over failing thrifts. The government promised that the buyers could record supervisory goodwill as an asset on their books and count it toward regulatory capital requirements. In 1989, Congress barred the use of supervisory goodwill, which resulted in losses for Glendale and Cal Fed, spurring their lawsuits. The Supreme Court ruled in 1986 that the government had breached the Glendale agreement, and litigants now are trying to recover billions of dollars in damages.
In April 1999, Chief Judge Loren A. Smith of the U.S. Court of Federal Claims awarded Golden State Bancorp $908.9 million in damages for Glendale Federal's case. Later that month, Judge Robert Hodges, Jr., awarded only $23.3 million for the Cal Fed case, an amount that fell far short of Cal Fed's actual damages. Both the government and Golden State Bancorp appealed both decisions. The Court of Appeals has not yet rendered its decision on the Cal Fed case appeal.
San Francisco-based Golden State Bancorp, with $61 billion in assets, is the publicly-traded parent company of Cal Fed. Cal Fed is the second-largest savings and loan in the U.S. in terms of assets, with more than 350 retail deposit branches in California and Nevada.
On May 7, 1998 Golden State Bancorp issued Litigation Tracking Warrants (TM) (Nasdaq:GSBNZ) to its then shareholders, which allow warrant holders to receive GSB common stock equal to 85% of any final damage award paid, net of expenses and taxes, in the Glendale Federal supervisory goodwill litigation. Independently, Cal Fed has issued Contingent Litigation Recovery Participation Interests (Nasdaq:CALGZ) and Secondary Contingent Litigation Recovery Participation Interests (Nasdaq:CALGL) representing potential interests in a recovery by Cal Fed in its separate supervisory goodwill litigation.
The complete text of the Feb. 16 decision of the Court of Appeals in the Glendale matter has been posted on Golden State Bancorp's Web site at www.goldenstate.com. |
