Backlash From The S&L Scandal

Attorneys for the Federal Deposit Insurance Corp. thought they couldn't have had a better case against John Henderson Jr., former chairman of two Texas savings and loans. In its 1991 lawsuit, the agency charged that Henderson, who ran the thrifts from 1984 to 1987, had squandered depositors' money on unsound loans, luxury cars, and two airplanes for his personal use. In March, a jury in a Texas federal court ordered Henderson to pay the feds $7 million.

But the FDIC may not see a nickel of it. Why? The agency lost an argument over whether it filed its suit fast enough. The FDIC had claimed that because of Henderson's tight control over the thrifts, the government didn't know how serious the problems were--and couldn't have sued--until it took over the S&Ls in 1988. But the jury found that the clock on the two-year statute of limitations started ticking earlier--and that the FDIC filed suit four years too late.

EASY START. Such setbacks have become common for the FDIC and the Resolution Trust Corp. in their crusade against former thrift and bank executives, directors, attorneys, and accountants. As the government tries to recoup for taxpayers the billions lost in thrift and bank failures, "the noose is definitely tightening around our necks," says Jack D. Smith Jr., FDIC deputy general counsel.

The latest blows came on June 13 in two Supreme Court actions that will force the feds to abide by state laws on issues such as statutes of limitations. Defense lawyers are ecstatic: State laws often are tougher than their federal counterparts. "The [regulators] have always tried to say they are outside the traditional law," says Stephen E. McConnico, an Austin (Tex.) lawyer who has represented directors in such suits. "The courts are saying no." Statute-of-limitations decisions alone could cripple 56 government cases involving as much as $1.5 billion in potential damages, about half of

all claims against professionals.

When their campaign began in 1987, government lawyers had it fairly easy. Their cases were high-profile and egregious. As of the first quarter of this year, the feds had recouped $3.9 billion in damages at a cost of $811 million.

Lately, though, state courts have been throwing out or paring down their cases when the alleged conduct isn't flagrant enough to justify hefty damages. In March, a California judge threw out a $292,000 jury award against outside directors of a failed Southern California bank. The judge found the directors had tried hard to save it, including injecting $2.8 million of their own money. "They never had a case," says Arthur E. Engel, a director who spent more than $300,000 on legal fees. The FDIC plans to appeal.

Critics say the agencies have themselves to blame for this backlash. The RTC, for example, had tried to subpoena financial data to see if thrift executives were wealthy enough to pursue--without stating why they suspected wrongdoing. In March, the federal appeals court in Washington ruled the RTC needs "at least an articulable suspicion" of misdeeds before it can get such subpoenas.

And last month, a Dallas court found the FDIC was liable for some of the $56 million in damages suffered by real estate developer Burnett Plaza Associates, the landlord of failed First RepublicBank Fort Worth. U.S. District Judge Joe Kendall ruled that the FDIC acted in a "high-handed and cavalier" manner in delaying its decision to break a lease with Burnett--unfairly forcing him to shoulder the risk of a plummeting commercial real estate market. The judge ordered the matter into mediation with the hope the parties will settle before his final ruling.

Given their recent track record in court, the FDIC and RTC are hoping Congress will step in. In April, at the agencies' urging, Senator Howard M. Metzenbaum (D-Ohio) introduced a bill reviving cases against bank insiders and outside advisers that had expired under statutes of limitations before the feds took the institutions over. Congressional sources say the high-court rulings may prod lawmakers into action, though the measure may get watered down.

The agencies also are hoping Congress will help them wrest money from reluctant insurers. Many director- and officer-insurance policies in the 1980s didn't cover damages in suits with the government. The RTC and FDIC had some initial success in overturning these exclusions, but recently their efforts have failed. The agencies want lawmakers to ban such exclusions to help them collect on $800 million in potential claims.

In their determination to nail the crooks, Congress has been supportive before, twice extending the statutes of limitations for cases involving gross negligence and fraud. Those moves, it seems, weren't enough. To enable the agencies to recoup billions more, Congress will have to go to the well again.


FDIC VS. DAWSON The Supreme Court let stand an October appeals court ruling that the FDIC could not sidestep state laws to pursue a case against directors and officers of a Texas bank.

RTC VS. STROOCK & STROOCK & LAVAN A Florida federal judge in May dismissed a $180 million malpractice suit against the Stroock law firm. The court found that the RTC didn't prove damages from an illegal junk-bond deal.

BURNETT PLAZA ASSOCIATES VS. FDIC A Texas court found in May that as the real estate market fell, the FDIC and a

bank unfairly delayed breaking a lease with a developer. The judge said the agency and bank owe the developer

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