Loren A. Smith -- one of the few judges who have granted any meaningful damages award thus far in the over 120 breach of contract suits brought against the government for its disallowance of supervisory goodwill. His 1992 ruling in the Winstar cases, after first being reversed by a three-judge panel, was affirmed by the Court of Appeals and U.S. Supreme Court in 9-2 and 7-2 rulings. Highly critical of the way the government has conducted its defense of the goodwill suits since, Judge Smith was not reappointed by President Clinton when his 15-year term as Chief Judge expired in July of 2000. He is now a Senior Judge and continues to preside over the Meritor case.
|
THE U.S. COURT OF FEDERAL CLAIMS
"I suspect that the government has been fighting so hard because it's afraid of being criticized for giving the plaintiffs some sort of windfall. But that's nonsense. It just goes to show you that there are a lot of people in the government who still don't get it when it comes to understanding what supervisory goodwill really is. All these thrifts are getting is their money back -- and 20 years later, without interest, at that. Helluva deal for the government, when you think about it."
--- A Texas attorney
When signing the Tucker Act into law in 1861, President Abraham Lincoln set forth the purposes and goals which his administration and the Congress expected from the newly-created U.S. Claims Court, using words which would be referred to today as a "mission statement". Nearly 140 years later, what President Lincoln said at the time is engraved in solid marble (in four-inch high letters) in the lobby of the building which houses what is now known as the United States Court of Federal Claims:
"It is as much the duty of the government to render prompt justice against itself, in favor of citizens, as it is to administer the same between private individuals."
Despite the passage of 15 years since FIRREA breached the goodwill contracts of numerous thrifts -- and even though the U.S. Supreme Court ruled in their favor over eight years ago in the first three "test" cases (i.e., Winstar, Glendale Federal Savings, and Statesman Savings, collectively referred to as the "Winstar" cases) -- only one thrift has been awarded any meaningful amount of damages -- and even in that case, not a penny has yet been paid. The $909 million award to Glendale Federal (which does not take into account the interest which the government has earned on the money since it first entered into the contract 20 years ago), was granted by Chief Judge Loren A. Smith in April of 1999 -- a full 10 years after the breach. Judge Smith's damages award -- which was reduced to $381 million on appeal -- is still being contested by the government, which insists that GlenFed is entitled to nothing beyond token professional and "deal" fees. (Editor's note: See June 26, 2002 update).
Free use of Other People's Money for 20 years
Although the courts have acknowledged the Supreme Court's well-established doctrine that the U.S. government, when entering into contracts, is generally bound to the same rules as apply to everyone else (See, for instance, Winstar Corp. v. the United States, 518 U.S. 839, 8995 [1996]), when it comes to one particular aspect of the goodwill cases, the judges have decided that the government is to get special treatment in one very important respect. For so far, at least, none of the Claims Court judges have ordered the government to give back the interest it has earned (actually, since the government is a net borrower, "saved") over the past 20 years on the $20 billion which belongs to the thrifts. In effect, the courts have upheld the government's right to take its citizens' money, use it for 20 years, and then return it to them in depreciated dollars. Or, put another way, it is as if the government compelled its citizens to give it an interest-free, 20 year loan. Even if Meritor, for instance, were awarded the full $800 million that it paid out to the depositors of Western Savings Bank, there is no question that $800 million in 2002 dollars cannot buy anywhere near it what it could have purchased back in 1982. Clearly, that is a harm; clearly it is yet another injury suffered by the thrifts which should be remedied. Yet the courts thus far have not only declined to do so, they have instead created a perverse incentive for the government to breach contracts in the future.
To illustrate how fundamentally unfair this is, consider the following:
It has been estimated that for every day of delay in paying the Winstar and other thrift plaintiffs, the government saves $5.14 million, or $1.875 billion per year. (See Winstar Damages, Northwestern Univ. Law Review, Vol. 94, No. 1 at footnote 135; or, simply click at the link in the next paragraph). Considering that the breach took place 11 years ago, the government has now saved $20.625 billion -- slightly more than the amount of the estimated original liability. But when you also add in the seven years prior to the breach during which the government had the use of the thrifts' money (1982-1989), the figure swells to $33.75 billion. Theoretically, at least, were the government ordered to pay back the goodwill only on a dollar-for-dollar basis (i.e., only the original $20 billion), it would reap a profit of $13.75 billion. Because the courts have so far agreed with the government's position on this issue, they are, in effect, encouraging the government to walk away from even more contracts in the future, knowing full well that with its vast resources and unlimited staying power, it can drag the resulting lawsuits on long enough to pay whatever damages that might be awarded out of the interest it saves in the meantime. Allowing a contract breacher to thus be "unjustly enriched" is directly contrary to the fundamental precepts of contract law. Indeed, first-year law school students are routinely taught that there should be no such thing as an "efficient" breach of contract. And to the extent that the government is the only contractor granted this exception, it makes a mockery of President Lincoln's noble motives in signing the Tucker Act into law.
When it comes to this issue, most of the judges appear to be relying for precedent on a case entitled Acme Process Equipment Co. v. the United States 347 F.2d 509 (Ct. Cl. 1965), reversed on other grounds, 385 U.S. 138 (1966). However, many observers believe that such reliance is misplaced for a number of reasons. This issue was recently the topic of an article in the Fall, 1999 edition of the Northwestern University Law Review. To view or print out the article, click here: Resource-228/NWLAWREVIEWARTICLE.pdf. (NOTE: You must have Adobe Acrobat Reader installed on your computer; PLEASE ALSO NOTE that the document consists of 27 mb -- if you are connected to a LAN or T-1 line, it should take about five minutes to download. However, IF YOU ARE CONNECTED TO A STANDARD TELEPHONE LINE, IT MAY TAKE UP TO 2 TO 3 HOURS).
|