Recent Developments in Goodwill Litigation

Charles J. Cooper and Vincent J. Colatriano*

The month of February saw two rather significant developments in the litigation of the so-called "Winstar-related" cases in the U.S. Court of Federal Claims. First, February 24, 1998 marked the first anniversary of the beginning of the damages trial in the Glendale case, one of the three cases in which the government’s liability for breach of a supervisory goodwill contract was established by the Supreme Court in United States v. Winstar Corp., 116 S. Ct. 2432 (1996). Second, on February 20, the government filed "show cause" pleadings in approximately 40 other Winstar-related cases, which pleadings demonstrate that, even after losing the Winstar-liability decision and even in the face of a scathing rebuke regarding its litigation tactics by Chief Judge Loren Smith, the government is still insisting on relitigating the core Winstar-liability issues in case after case.

Turning first to the Glendale case: what was originally -- and, it turns out, unrealistically -- projected to be a month-long trial has entered its second year. This is not altogether surprising, given the huge amounts at stake in that trial. The plaintiff in Glendale is seeking a recovery of well over a billion dollars, under several different damages theories. Both the plaintiff and the government have put on numerous expert witnesses who have testified regarding, among other things, how the plaintiff thrift would have fared financially if the government had not breached its supervisory goodwill contract, and how much money the government saved as a result of the plaintiff’s performance of that contract. The plaintiff finished putting on its case-in-chief last July. The government begin its case-in-chief immediately after Labor Day, and just finished presenting its case in late February 1998. The plaintiff is currently putting on its rebuttal case, expected to last through mid-March, after which the government is expected to put on a sur-rebuttal case, which is expected to last into the first week of April. A decision is expected later this year.

The damages trial in the Statesman case -- another one of the three cases that were before the Supreme Court in Winstar -- is expected to go to trial in mid-May before Judge Christine Miller. The trial in the Statesman case is expected to be much shorter in duration than the Glendale trial, and should last, by our estimate, between 6 and 8 weeks. Notwithstanding its shorter expected duration, the Statesman trial is expected to raise several complex issues that are not faced by the litigants in the Glendale trial. The most significant complicating factor in Statesman is the fact that there are three different parties in that case: (1) the original plaintiffs, which were the owners of and investors in the Statesman Bank for Savings, and which were also, along with Statesman Bank, parties to the contract with the government; (2) the defendant (i.e., the government); and (3) the Federal Deposit Insurance Corporation, which has intervened, as a party plaintiff, purportedly to represent the interests of Statesman Bank, which was placed into receivership as a result of the government’s breach. The presence of the FDIC has raised complicated issues regarding, among other things, the circumstances under which one government agency may sue the United States, and whether the original holding company plaintiffs are entitled to a direct recovery of damages against the government or whether, instead, any such damages awarded must "flow through" the Statesman Bank receivership estate. A decision in Statesman is also expected later this year.

Notwithstanding the fact that his dance card is more than full with the Glendale trial, Chief Judge Smith has also found time to deal with the government’s continuing efforts to evade its responsibility for breaching scores of other supervisory goodwill contracts. In an article published in the Spring 1997 issue of this publication, we described the "common issue" process, established under the case management plan governing proceedings in all Winstar-related cases, pursuant to which the parties have attempted to identify "common" or "cross-cutting" issues for resolution by the Court. Pursuant to this process, the plaintiffs last year identified eleven common issues which had been raised by the government in its responses to summary judgment motions seeking to establish the government’s liability in approximately forty other Winstar-related cases. All eleven of these common issues raised by the government, in the plaintiffs’ opinion, failed to distinguish, in any meaningful way, the cases in which such issues were raised from the three Winstar cases which the Supreme Court had decided. In fact, most of these issues represented subtle -- and, in some cases, not so subtle -- attempts by the government to relitigate the core liability issues which had been litigated and decided in Winstar. At the plaintiffs’ urging, Chief Judge Smith agreed to hear and resolve these common issues in the context of the Court’s resolution of the summary judgment motions filed in four of the thirteen so-called "priority" cases, i.e., those cases that will be the first to be tried following the Glendale and Statesman trials. Chief Judge Smith heard oral argument in these four cases -- the Cal Fed, Lasalle Talman, Landmark, and Suess cases -- during a marathon two-day session held in San Francisco in August.

The Court issued its "common issue" decision in these four cases on December 22, 1997. California Federal Bank, et al. v. United States, 1997 WL 78936 (Ct. Fed. Cl. Dec. 22, 1997). Using sharply-worded language that "severely criticize[d] the tactics and approach of the government" in these cases, the Court ruled in the plaintiffs’ favor with respect to all eleven common issues, holding that none of the common arguments raised by the government precluded a finding that the government had breached its contractual promises. Noting at the outset of its opinion that it "is the obligation of the United States to do right," the Court noted that in these cases "the United States has not acted in a manner worthy of the great just Nation it is." "Because the dollars at stake appear to be so large," the Court went on, "the government has raised legal and factual arguments that have little or no basis in law, fact or logic." The Court was not finished: "[i]f the arguments put forth here are the strongest the United States can muster against liability then the government has a moral obligation to seek a fair and equitable settlement from the parties whose contracts were breached."

The Court concluded its decision by granting summary judgment with respect to the common issues for the plaintiffs in the four cases before it. The Court also gave the government, in the approximately forty Winstar-related cases in which summary judgment motions were pending, sixty days to "show cause . . . why those motions should not be granted, and liability found on all Winstar contract issues based upon the instant decision." The Court warned that in preparing these "show cause" filings, the government was not to raise issues "that have been resolved by opinions in the original Winstar cases as clarified in this decision." "[F]ailure to follow this order," the Court further admonished, "will require the government to reimburse the plaintiffs for attorneys fees spent litigating issues that have already been resolved."

In late February, the government filed its "show cause" filings pursuant to Chief Judge Smith’s December 22 decision. These filings demonstrate that the government has not heeded the Court’s admonition that it stop attempting to relitigate the core Winstar-liability issues. Although the government in these filings paid lip service to the proposition that it could not continue to relitigate the eleven common issues decided by the Court, a close reading of the government’s filings demonstrates that the government is continuing to press these issues, and in fact thinks it may be entitled to discovery with respect to such issues before the Court may enter liability findings in the Winstar-related cases. (To be sure, in one case, the Coast case, the government has apparently abandoned any effort to contest the entry of a liability judgment against it). Indeed, perhaps in recognition of the fact that its "show cause" filings failed to conform to the Court’s order, the Department of Justice took the remarkable step of having the Director of the Commercial Litigation Branch enter his own personal appearance with respect to the government’s "show cause" filing in each case, apparently to spare the Department’s line attorneys from being exposed to sanctions by the Court. At the time of the writing of this article, the parties and the Court are exploring how to proceed in the aftermath of the government’s show cause filings.

*Charles Cooper is a partner at Cooper, Carvin & Rosenthal, PLLC, in Washington, D.C. and previously served as Assistant Attorney General, Office of Legal Counsel, U.S. Department of Justice. Vincent J. Colatriano is also a partner at Cooper, Carvin & Rosenthal. Cooper, Carvin & Rosenthal represents the plaintiffs in a number of Winstar-related cases, including the Winstar, Statesman, Cal Fed, and Coast cases.


2001 The Federalist Society