United States v. Winstar Corp.
518 U.S. 839, 135 L. Ed. 2d 964, 1996 U.S. LEXIS 4266 (1996)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When the U.S. government enters into contracts that promise specific regulatory treatment to induce private parties to perform an action, a subsequent act of Congress that abrogates those contractual duties constitutes a breach for which the government is liable in damages.
Facts:
- During a savings and loan crisis in the 1980s, federal regulators, including the Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Home Loan Bank Board (Bank Board), sought to avoid liquidating failing thrifts due to insufficient insurance funds.
- Regulators induced healthy institutions, including Glendale Federal Bank, Winstar Corporation, and The Statesman Group, to acquire failing thrifts through 'supervisory mergers'.
- A key inducement was the government's formal promise that the acquiring institutions could count an intangible asset, 'supervisory goodwill,' toward their minimum regulatory capital requirements.
- The agreements also specified long amortization periods for this goodwill, a term essential for the acquiring institutions to remain solvent and profitable after assuming the liabilities of the failing thrifts.
- Glendale (in 1981), Winstar (in 1984), and Statesman (in 1988) each entered into formal agreements with regulators based on these promises.
- In 1989, to address the escalating thrift crisis, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).
- FIRREA mandated new, stricter capital standards that largely disallowed the use of supervisory goodwill to meet regulatory capital requirements, directly contradicting the terms of the prior agreements.
Procedural Posture:
- Glendale Federal Bank, Winstar Corporation, and The Statesman Group, Inc. each filed separate lawsuits against the United States in the U.S. Court of Federal Claims, alleging breach of contract.
- The Court of Federal Claims granted partial summary judgment on liability in favor of all three plaintiffs.
- The cases were consolidated, and the liability rulings were certified for an interlocutory appeal to the U.S. Court of Appeals for the Federal Circuit.
- A three-judge panel of the Federal Circuit initially reversed the trial court's decision.
- The Federal Circuit vacated the panel decision and reheard the case en banc, ultimately affirming the Court of Federal Claims' finding of government liability.
- The United States sought and was granted a writ of certiorari from the U.S. Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a subsequent Act of Congress (FIRREA), which alters regulatory capital requirements for thrift institutions, constitute a breach of prior contracts where federal agencies promised specific accounting treatment, or is the government shielded from liability by sovereign power doctrines like the unmistakability doctrine and the sovereign acts doctrine?
Opinions:
Plurality - Justice Souter
Yes. The subsequent Act of Congress constitutes a breach of prior contracts. The government formed binding contracts promising to allow the use of supervisory goodwill, and by enacting FIRREA, it breached those agreements. The unmistakability doctrine does not apply because the contracts were risk-shifting agreements that did not surrender sovereign power, and the sovereign acts doctrine does not apply because FIRREA was not a 'public and general' act in this context, as it was specifically aimed at abrogating these contracts, and the risk of regulatory change was foreseeable and allocated to the government.
Concurrence in the judgment - Justice Scalia
Yes. The government is liable for breach of contract. The unmistakability doctrine applies, but its presumption is overcome because the promise to provide favorable regulatory treatment was the very subject matter of the contracts and essential to the bargain, making the promise to continue that treatment unmistakable. The sovereign acts doctrine is inapplicable because the government clearly assumed the risk of a change in its own laws by making these specific promises.
Concurrence - Justice Breyer
Yes. The government is liable for breach. Ordinary principles of contract interpretation apply, and the language and circumstances show the government made a binding promise to hold the thrifts harmless from the effects of future regulatory changes. The unmistakability doctrine should not be read as a rigid clear-statement rule that displaces normal contract law in cases like this.
Dissenting - Chief Justice Rehnquist
No. The government is not liable for breach. The unmistakability doctrine should apply, and the thrifts failed to show an unmistakable surrender of Congress's sovereign power to regulate. Furthermore, FIRREA was a 'public and general' sovereign act—a comprehensive regulatory reform—for which the government cannot be held liable as a contractor.
Analysis:
This decision significantly narrowed the scope of the unmistakability and sovereign acts doctrines, making it more difficult for the government to escape contractual liability by citing its sovereign powers. It affirmed that when the government acts as a commercial partner and makes specific promises to induce action, it can be held to the financial consequences of those promises, even if a subsequent Congress changes the law. The ruling increases the government's reliability as a contracting party but also potentially raises the costs of future policy changes that conflict with prior contractual commitments.
Unlock the full brief for United States v. Winstar Corp.