FDIC Ordered to Pay Financier $72 Million
Judge Denounces Debt-for-Trees Deal

By Terence O'Hara
Washington Post Staff Writer
Thursday, August 25, 2005

A federal judge in Texas, calling the Federal Deposit Insurance Corp. a "corrupt agency with corrupt influences on it," awarded a Houston financier $72 million to cover his legal fees in a decade-long suit involving a failed savings and loan and the government's efforts to take control of a stand of endangered California redwood trees in the 1990s.

The FDIC, a regulatory agency that insures deposits at banks and savings and loans, filed suit against Charles E. Hurwitz in 1995, seeking to collect more than $800 million because Hurwitz indirectly controlled a Texas S&L that failed in 1988. The FDIC, after a series of legal setbacks, dropped its suit against Hurwitz in 2002. Hurwitz then asked the U.S. District Court judge overseeing the case, Lynn N. Hughes, to order the FDIC to pay his legal expenses, arguing that the FDIC should never have brought the case in the first place.

On Tuesday evening, Hughes issued a scathing, 131-page ruling. In it, he cited evidence that the FDIC brought the case largely because of pressure from environmental groups, members of Congress and the Clinton administration. The reason: Hurwitz's Pacific Lumber Co. owned 3,500 acres of endangered redwoods in Northern California. Hughes found that the FDIC, in close concert with environmental groups, sued Hurwitz to pressure him into a "debt-for-nature" swap, in effect giving the government his trees in exchange for his supposed liability in the failure of the United Savings Association of Texas.

Judge Hughes, in his ruling, found that FDIC officials lied about the reasons for bringing the 1995 suit against Hurwitz.

Hughes said FDIC officials and lawyers, in depositions, "ranged from manipulative evasiveness to plain perjury." He cited records of two years of communications, including extensive discussions of legal strategy and political matters, between the FDIC and environmentalists over the proposal to use a banking-practices lawsuit as pressure on Hurwitz to give up the redwoods.

Hughes said FDIC officials "discarded the mantle of the American Republic for the cloak of a secret society of extortionists. If the vice president called, they responded. If a congressman called, they responded. If a lobbyist called, they responded. They heeded every call but that of duty and honor."

David Barran, an FDIC spokesman, said the agency will appeal the ruling.

"This is certainly one of the most imaginative and colorful opinions in banking law," Barr said. "Judge Hughes has been overturned twice by the 5th Circuit in this case, and we're confident that history will repeat itself."

Hughes was appointed to the U.S. District Court for the Southern District of Texas in 1985 by President Ronald Reagan. In 20 years, he has gained a reputation for issuing strongly worded opinions, several of them accusing the government of overreaching in criminal and civil cases. In 1998, the U.S. Court of Appeals for the 5th Circuit twice overruled Hughes's decision to unseal internal FDIC legal memoranda in the Hurwitz case.

In an interview yesterday, Hurwitz said he felt vindicated. "It's an enormous burden to be sued by the government for a billion dollars," he said. "It's different than when you're sued by another corporation or an individual. There's a higher standard to overcome. I've thought about it every day for 10 years . . . You have to ask, what was this case for? Why did they bring the biggest case ever against me? It was for some trees."

The federal government and California bought the trees from Hurwitz in 1999 for $480 million.

The case is one of the longest-running and most political lawsuits arising out of the S&L crisis of the late 1980s and early 1990s, in which more than 1,000 S&Ls failed at a cost to taxpayers of about $200 billion. Several former thrift owners have won legal settlements against the government for breach of contract after Congress passed a 1989 law that rendered many thrifts insolvent.

But this is the only case won by a former thrift owner alleging a political vendetta against him by regulatory authorities, according to James J. Butera, a District banking lawyer who has represented several thrifts in cases against the government.

"A lot of banking lawyers representing these thrift owners will be looking at this ruling very carefully," Butera said. "For an individual plaintiff to prevail against the government in the banking area, it's highly unusual. The power of the regulators is almost plenary."

© 2005 The Washington Post Company