DOUGLAS YOUNG Staff Reporter
The date of Feb. 24, 1997 carries special significance for attorneys Doreen Blauschild of Southern California Federal Savings and Loan and Dennis Winston, who represents the now-defunct Western Federal Savings and Loan.
That’s the start date for the trial to determine damages owed to Glendale Federal Bank by the federal government for a breach of contract in 1989 that cost the thrift industry billions of dollars and drove dozens of savings and loans out of business altogether.
Many of L.A.’s largest thrifts, including Glenfed, Home Savings of America, Coast Savings Financial, and California Federal Bank have filed similar lawsuits against the government, with net damages estimated in the billions of dollars.
But forgotten in the shuffle are smaller thrifts like Southern California Federal of downtown L.A. and Western Federal of Marina del Rey, which were severely impacted by the breach of contract and in Western Federal’s case, even forced out of business.
The breach of contract that has thrifts nationwide lining up to collect from the federal government involves the issue of supervisory goodwill an intangible asset that functioned like capital.
The federal government awarded goodwill in the 1980s to healthy thrifts that agreed to absorb other thrifts that were failing at the time. The healthy institutions could absorb the liabilities of failing ones by using goodwill to meet their capital requirements as laid out by federal law.
However, Congress passed legislation in 1989 that led to the eventual negation of goodwill, which sent thrifts scrambling to meet their capital requirements under the new formula.
As a result of the change, most thrifts saw their asset size significantly reduced, while others couldn’t meet the requirements and were eventually seized by federal regulators.
Now Southern California Savings, Western Federal and a host of other smaller thrifts are lining up behind Glenfed, which is one of the lead cases in the goodwill dispute.
By letting other larger thrifts set the precedents, smaller institutions could minimize their expenses in fighting individual goodwill lawsuits.
The courts already have found the federal government liable in the Glenfed case, and the last remaining step is to determine what kind of damages the government must pay the thrift.
For the now-defunct Western Federal, the money to press its case against the government is coming from limited assets in the thrift’s still-existent holding company, WestFed Holdings, said Winston, a partner at the law firm of Brestoff & Winston in Santa Monica and the attorney representing WestFed.
Western Federal absorbed failing thrift Bell Savings and Loan of Northern California in 1988 and relied on federal goodwill to meet its capital requirements after the merger, Winston said.
“(Western Federal) got its supervisory goodwill, and everything was hunky dory” until the federal government reneged on the deal, he explained.
The cancellation of goodwill in 1989 marked the beginning of a downward spiral for Western Federal, which struggled to meet its capital requirements before finally being seized by federal regulators in 1993. In the four years leading up to the seizure, Western Federal saw its total assets fall from $4.8 billion in 1989 to $3.5 billion in 1993.
The thrift filed its lawsuit against the federal government in November 1992, just prior to its failure. The case has yet to be heard.
“We plan to file a motion for a summary judgment, probably within the next couple of months,” said Winston, explaining that WestFed officials hope to cite the Glenfed case as the basis for finding the federal government liable in the matter.
If the judge agrees to a summary judgment without trial, Western Federal’s case will proceed to the damages stage, though Winston and other plaintiffs’ attorneys are waiting for the Glenfed case to see how damages might be calculated.
Likewise, Southern California Savings and Loan filed its breach of contract lawsuit against the federal government in 1993 and is waiting for the outcome of the Glenfed and other precedent-setting cases before moving forward with its own case, according to Doreen Blauschild, Southern California Savings’ general counsel.
“We filed (our lawsuit) to preserve our rights, as did every institution. As to doing any analysis (on damages), we haven’t pressed ahead with that yet,” she said, adding that Southern California Savings doesn’t anticipate going to court for at least a year.
The type of damages Western Federal and Southern California Federal can expect to receive will be determined in part by the Glenfed case next month.
Glenfed has put forth three theories for calculating damages, ranging anywhere from $800 million to $1.8 billion, according to Glenfed chief credit officer Richard Fink.
Analysts in Washington have estimated that the federal government could eventually pay up to $20 billion in damages resulting from the 122 goodwill cases currently pending nationwide.