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August 24, 2005

Judge Hughes hammers the FDIC in the Hurwitz case

Hurwitz.gifOne of the more interesting (and longstanding) local civil lawsuits turned an interesting corner yesterday.

U.S. District Judge Lynn Hughes -- unquestionably the Houston federal judge most likely to challenge the government's position in any case -- handed down this 133 page broadside yesterday ordering the Federal Deposit Insurance Corp. to pay Houston financier and longtime environmentalist target Charles Hurwitz $72.3 million in sanctions for the FDIC's conduct in connection with prosecuting a civil lawsuit to hold Mr. Hurwitz and other directors of the defunct United Savings of Texas personally responsible for $250 million in connection with the $1.6 billion loss resulting from the S&L's 1988 failure.

There is a lot of background to this saga. The FDIC sued Mr. Hurwitz -- the chairman and chief executive of Houston-based Maxxam Inc. -- and other United Savings directors (including the talented Barry Munitz) in 1995. Interestingly, the FDIC did not contend in the lawsuit that Mr. Hurwitz and Maxxam had looted United Savings; rather, the agency contended merely that Mr. Hurwitz and Maxxam had an obligation to invest more money in the sinking ship of United even after it was clear that the S&L was going down the tubes.

Meanwhile, Mr. Hurwitz and his attorneys smelled a rat, and they contended in a counterclaim that the lawsuit was simply a device to mollify environmentalists and pressure Maxxam subsidiary Pacific Lumber to give up 5,000 acres of redwood forests in Northern California. The FDIC denied any such political motivation, but discovery in the lawsuit revealed that the FDIC representatives had, in fact, consulted extensively with environmental groups on the so-called "debt-for-nature" swap before filing the lawsuit. Judge Hughes was not pleased when that evidence was revealed to him, and he reiterated that displeasure in his opinion:

"The record shows that the swap was the only reason for this suit. It also shows that the FDIC knew that it had no factual or legal basis for its claims, and that its cases here and in Washington were shams."

At any rate, the lawsuit lagged on for years, and I had a running joke with Mr. Hurwitz's attorneys when I would see them at the federal courthouse that they were engaged in the legal equivalent of Bill Murray's plight in Groundhog Day. After imnumerable run-ins with Judge Hughes, the FDIC tried to just drop the whole mess in 2002, but Mr. Hurwitz refused to drop his counterclaim against the agency for improperly funding another government agency's investigation against Maxxam on the same subjet matter of the lawsuit. As a result of that investigation, the Office of Thrift Supervision filed a similar suit against Mr. Hurwitz and Maxxam for $821 million, but settled that lawsuit in 2002 for a paltry $200,000.

As usual, Judge Hughes is acerbic in his opinion regarding the FDIC's conduct, noting in particular that FDIC officials "lied about it all under oath" and they "discarded the mantle of the American Republic for the cloak of a secret society of extortionists." Another gem:

"It's hard to find a word that captures the essence of the FDIC's bringing this action. Irresponsible is close. Arbitrary, dishonest, exploitative, extortionate, and abusive all fit."

Judge Hughes concluded that Hurwitz and Maxxam "will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation." The $72.3 million awarded to Maxxam and Hurwitz covers attorneys costs and interest incurred in connection with the governmental investigations, which will be reduced to $15.3 million if the Fifth Circuit rules that Mr. Hurwitz and Maxxam can only recover costs from the FDIC.

Posted by Tom at August 24, 2005 5:21 AM |


Ugh. This is a scandal of the first degree. Heads will roll at the FDIC. Responsible reporters will be descending on Houston in droves to fully report this latest example of governmental abuse. And we the people will now be much more skeptical of the motives of those who serve us in the federal government. Right?

Posted by: Preston Tucker at August 24, 2005 6:55 AM

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