Sterling Wins Another Round Vs. Government U.S. Claims Court Ruling Paves Way For Local Thrift To Seek $100 Million Damage Claim In “Goodwill” Dispute

The federal government’s attempts to avoid paying billions of dollars in damages to Sterling Financial Corp. and more than 100 other savings and loans has hit another roadblock.

In a scathing ruling Monday, a federal court judge rejected U.S. government arguments that the government did not breach its contracts with the thrifts in the aftermath of the savings and loan crisis of the late 1980s.

The ruling puts Sterling at least one step closer to collecting compensation for an estimated $100 million in losses thus far.

Spokane-based Sterling was one of many thrifts that - while continuing to be profitable - were technically out of compliance with the new solvency guidelines.

Only federal court action in 1990 kept the government from putting Sterling out of business. Some thrifts involved in the current lawsuits were shut down, but even the survivors, like Sterling, say they have suffered millions in damages and lost opportunities as a result.

“Every day, every month, every year this thing gets delayed, our damages continue to pile up,” Heidi Stanley, senior vice president of Sterling Financial Corp., said Monday, “because that’s money that could be in use.

“In our business, the use of money is how we make money.”

U.S. Claims Court Judge Loren Smith’s rejection of the government’s arguments yesterday was adamant.

In commenting on one of the government’s key arguments, he wrote: “If the government had made the argument that plaintiff bank had been kidnapped by UFO’s, it would have been no more incredible…” But the UFO argument would have been a better one, he added, “because at least it would have been entertaining.”

During the mid-to-late 1980s, the U.S. government was struggling with the mounting costs of insolvent federally-insured savings and loans. The thrifts had gotten in trouble because, a few years earlier, the industry had been deregulated, allowing thrifts to invest in riskier projects than home loans. Reckless thrifts quickly got into trouble.

So the government asked solvent thrifts, like Sterling, to acquire some of their struggling brethren. Sterling made three such acquisitions, absorbing institutions with a total negative net worth of $50 million and $40 million more in troubled loans.

That bad debt would have wreaked havoc on Sterling’s books had the government not agreed to recognize “supervisory goodwill” as assets on the books of acquiring companies.

Congress, meanwhile, was rewriting laws regulating thrifts and the new guidelines no longer recognized supervisory goodwill.

Suddenly, even though it continued to be profitable, Sterling was out of compliance with the solvency guidelines, and the government prepared to force them out of business.

Sterling won a suit preventing the takeover in mid-1990. It then joined more than 100 other institutions suing the government for damages based on breach of contract.

Last year, the U.S. Supreme Court ruled that the government could be sued for breach of contract, putting the cases in the U.S. Court of Claims. That led to Monday’s ruling on the question of whether the government was liable for damages.

In the ruling, Smith granted summary judgment in four test cases involving Cal Fed Bancorp Inc., Ben Franklin Savings and Loan Association, Landmark Land Co., and LaSalle Talman Bank.

He also notified government attorneys that unless they have better arguments, he will grant summary judgment rulings to the others, including Sterling, in 60 days.

Stanley said, “We are assuming summary judgment will be granted. Once that happens, we get in line and go from there.”

The thrifts and the government then would argue the amount of damages due on a case-by-case basis.

That means that Sterling’s settlement could still be months or even years away.

Throughout the battle, Sterling has continued to prosper.

The company sold stock to rebuild capital, and has since grown to a $1.8 billion institution with 41 branches and 500 employees.

, DataTimes