Ruling Reinforces Sterling’s Case Appeals Court Lets Another Thrift Pursue Claim Against Government

Sterling Financial Corp. could learn today whether it will be allowed to pursue a bid for more than $30 million in damages from the federal government.

The Office of Thrift Supervision and Federal Deposit Insurance Corp. have asked U.S. District Court Judge Justin Quackenbush to dismiss the five-year-old claim, and to block transfer of the case to the Federal Court of Claims.

A hearing on the motions is scheduled this morning.

But Sterling’s effort appeared to get a major boost Wednesday, when the Federal Circuit Court of Appeals ruled that the federal government breached a contract with Glendale Federal Bank of California.

Glendale, like Sterling, had been granted accounting breaks called “supervisory goodwill” in exchange for taking over failing thrifts in the 1980s.

The goodwill was counted as an asset on the books of the surviving thrifts.

The alternative for the government was additional billions in liabilities for deposit funds swamped by a wave of collapsing institutions.

Sterling was induced to take over three regional thrifts in return for about $30 million in goodwill: Central Evergreen Federal Savings & Loan; TriCities Savings & Loan Association; and Lewis Federal Savings & Loan Association.

Glendale received more than $700 million in goodwill credits.

But in 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act, which disallowed the use of goodwill as capital in thrift accounting.

Sterling, Glendale and dozens of other thrifts were suddenly short of capital, and several failed. Sterling avoided potential closure by obtaining a restraining order from Quackenbush blocking action by OTS and the FDIC.

Given a breather, the thrift subsequently sold stock to shore up its capital base and has since prospered.

Senior Vice President Heidi Stanley said Thursday day the 1989 legislation and threat of closure was a severe setback to Sterling, one the Court of Appeals ruling could help reverse.

“It’s exactly the same case we have,” she said of the Glendale ruling.

Besides finding the government violated its contracts with Glendale, the court, voting 9-2, found it could not avoid paying damages by claiming sovereign immunity.

If Quackenbush agrees to let Sterling pursue its claim, Stanley said officials will attempt to recover the goodwill wiped off the books five years ago, plus interest and other damages.

But success in Quackenbush’s court, plus the Court of Claims, will not be the end of the matter, she noted. Funds to pay the claim must be appropriated by Congress, which may be looking at a total $15 billion in expenditures on top of $120 billion already spend to clean up the thrift mess.

Sterling’s stock was heavily traded in the hours following release of the ruling, closing Wednesday at $13.25, up $1.75. The shares surrendered 50 cents Thursday, closing at $12.75.

, DataTimes