Magazine article American Banker

Ruling Bodes Well for Goodwill Litigants

Magazine article American Banker

Ruling Bodes Well for Goodwill Litigants

Article excerpt

Thrift executives with goodwill cases should be smiling.

Judge Loren A. Smith of the U.S. Court of Federal Claims, the same judge who is hearing the goodwill cases, made a legal conclusion in an unrelated matter that could pave the way for these bankers to collect billions of dollars in damages.

Judge Smith, in awarding Wells Fargo Bank $10.8 million in a breach-of contract suit last month, adopted a damages formula that favors the goodwill litigants.

The judge ruled that a bank, if it is subject to illegal capital restrictions, can collect damages equal to what it would have made if it lent the money that regulators improperly tied up.

"The significant thing here is that Judge Smith understands (the damages theory) and accepts it," said one lawyer familiar with the case. "This is a significant precedent."

The judge's ruling comes from a case that has nothing to do with regulatory goodwill, the accounting gimmick that regulators let thrifts use to acquire failing institutions without destroying their own capital condition.

But lawyers agreed that the judge's reasoning transcends Wells Fargo, a case that began in the early 1980s when the bank agreed to finance High Plains Corp.'s construction of an ethanol plant.

The Farmers Home Administration agreed to guarantee 90% of the loan, provided the bank met several conditions.

Wells Fargo, relying on the agency's assurance, lent the construction funds. Later, however, the FmHA balked at guaranteeing the loan.

The bank was left in a precarious position. It already had lent the money, but it had no guarantee and it would have incurred substantial losses if it tried to liquidate the project.

So Wells Fargo kept the ethanol plant alive, hoping the company could become strong enough to repay its loan.

Regulators grew impatient, forcing the bank to continually write off more and more of the loan. …

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