U.S. v. Winstar Corp.

• Decision Date: 01 July 1996
• Docket Number: 95865
• Citation: 116 S.Ct. 2432,135 L.Ed.2d 964,518 U.S. 839
• Parties: UNITED STATES v. WINSTAR CORP. et al.
• Court: U.S. Supreme Court

518 U.S. 839

116 S.Ct. 2432

135 L.Ed.2d 964

UNITED STATES

v WINSTAR CORP. et al.

Certiorari to the United States Court of Appeals for the Federal Circuit.

No. 95-865.

Supreme Court of the United States

Argued April 24, 1996

Decided July 1, 1996

Syllabus

Realizing that the Federal Savings and Loan Insurance Corporation (FSLIC) lacked the funds to liquidate all of the failing thrifts during the savings and loan crisis of the 1980's, the Federal Home Loan Bank Board encouraged healthy thrifts and outside investors to take over ailing thrifts in a series of "supervisory mergers." As inducement, the Bank Board agreed to permit acquiring entities to designate the excess of the purchase price over the fair value of identifiable assets as an intangible asset referred to as supervisory goodwill, and to count such goodwill and certain capital credits toward the capital reserve requirements imposed by federal regulations. Congress's subsequent passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) forbade thrifts from counting goodwill and capital credits in computing the required reserves. Respondents are three thrifts created by way of supervisory mergers. Two of them were seized and liquidated by federal regulators for failure to meet FIRREA's capital requirements, and the third avoided seizure through a private recapitalization. Believing that the Bank Board and FSLIC had promised that they could count supervisory goodwill toward regulatory capital requirements, respondents each filed suit against the United States in the Court of Federal Claims, seeking damages for, inter alia, breach of contract. In granting each respondent summary judgment, the court held that the Government had breached its contractual obligations, and rejected the Government's ``unmistakability defense''-that surrenders of sovereign authority, such as the promise to refrain from regulatory changes, must appear in unmistakable terms in a contract in order to be enforceable, see Bowen v. Public Agencies Opposed to Social Security Entrapment, 477 U. S. 41, 52-and its ``sovereign act defense-that a ``public and general'' sovereign act, such as FIRREA's alteration of capital reserve requirements, could not trigger contractual liability, see Horowitz v. United States, 267 U. S. 458, 461. The cases were consolidated, and the en banc Federal Circuit ultimately affirmed.

Held: The judgment is affirmed, and the case is remanded. 64 F. 3d 1531, affirmed and remanded.

Justice Souter, joined by Justice Stevens, Justice O'Connor, and Justice Breyer, concluded in Parts II, III, IV, and IV-C, that the United States is liable to respondents for breach of contract. Pp. 19-57; 66-72.

(a) There is no reason to question the Federal Circuit's conclusion that the Government had express contractual obligations to permit respondents to use goodwill and capital credits in computing their regulatory capital reserves. When the law as to capital requirements changed, the Government was unable to perform its promises and became liable for breach under ordinary contract principles. Pp. 19-30.

(b) The unmistakability doctrine is not implicated here because enforcement of the contractual obligation alleged would not block the Government's exercise of a sovereign power. The courts below did not construe these contracts as binding the Government's exercise of authority to modify its regulation of thrifts, and there has been no demonstration that awarding damages for breach would be tantamount to such a limitation. They read the contracts as solely risk-shifting agreements, and respondents seek nothing more than the benefit of promises by the Government to insure them against any losses arising from future regulatory change. Applying the unmistakability doctrine to such contracts would not only represent a conceptual expansion of the doctrine beyond its historical and practical warrant, but would compromise the Government's practical capacity to make contracts, which is "of the essence of sovereignty" itself, United States v. Bekins, 304 U. S. 27, 51-52. Pp. 31-48.

(c) The answer to the Government's unmistakability argument also meets its two related ultra vires contentions: that, under the reserved powers doctrine, Congress's power to change the law in the future was an essential attribute of its sovereignty that the Bank Board and FSLIC had no authority to bargain away; and that in any event no such authority can be conferred without an express delegation to that effect. A contract to adjust the risk of subsequent legislative change does not strip the Government of its legislative sovereignty, and the contracts did not surrender the Government's sovereign power to regulate. And there is no serious question that FSLIC (and the Bank Board acting through it) lacked authority to guarantee respondents against losses arising from subsequent regulatory changes. Pp. 49-52.

(d) The facts of this case do not warrant application of the sovereign act doctrine. That doctrine balances the Government's need for freedom to legislate with its obligation to honor its contracts by asking whether the sovereign act is properly attributable to the Government as contractor. If the answer is no, the Government's defense to liability depends on whether that act would otherwise release the Government from liability under ordinary contract principles. Pp. 52-57.

(e) Even if FIRREA were to qualify as a "public and general" act, the sovereign act doctrine cannot excuse the Government's breach here. Since the object of the doctrine is to place the Government as contractor on par with a private contractor in the same circumstances, Horowitz v. United States, 267 U. S., at 461, the Government, like any other defending party in a contract action, must show that passage of the statute rendering its performance impossible was an event contrary to the basic assumptions on which the parties agreed, and, ultimately, that the language or circumstances do not indicate that the Government should be liable in any case. The Government has not satisfied these conditions. There is no doubt that some changes in the regulatory structure governing thrift capital reserves were both foreseeable and likely when the parties contracted with the Government. In addition, any governmental contract that not only deals with regulatory change but allocates the risk of its occurring will, by definition, fail the further condition of a successful impossibility defense, for it will indeed indicate that the parties' agreement was not meant to be rendered nugatory by a change in the regulatory law. That the Bank Board and FSLIC could not themselves preclude Congress from changing the regulatory rules does not stand in the way of concluding that those agencies assumed the risk of such change, for determining the consequences of legal change was the point of the agreements. Pp. 66-72.

Justice Souter, joined by Justice Stevens and Justice Breyer, concluded in Parts IV-A and IV-B, that, since the Government should not be excused by legislation when the substantial effect of regulation was to help itself out of improvident agreements, it is impossible to attribute the exculpatory "public and general" character to FIRREA. That statute not only had the purpose of eliminating the very accounting "gimmicks" that acquiring thrifts had been promised, but the congressional debates indicate Congress's expectation, which there is no reason to question, that FIRREA would have a substantial effect on the Government's contractual obligations. The evidence of Congress's intense concern with contracts like those at issue is not neutralized by the fact that FIRREA did not formally target particular transactions or by FIRREA's broad purpose to advance the general welfare. Pp. 58-65.

Justice Scalia, joined by Justice Kennedy and Justice Thomas, agreed that the Government was contractually obligated to afford respondents favorable accounting treatment, and violated its obligations when it discontinued that treatment under FIRREA. The Government's sovereign defenses cannot be avoided by characterizing its obligations as not entailing a limitation on the exercise of sovereign power; that approach, although adopted by the plurality, is novel and fails to acknowledge that virtually every contract regarding future conduct operates as an assumption of liability in the event of nonperformance. Accordingly, it is necessary to address the Government's various sovereign defenses, particularly its invocation of the ``unmistakability'' doctrine. That doctrine simply embodies the commonsense presumption that governments do not ordinarily agree to curtail their sovereign or legislative powers. Respondents have overcome that presumption here in establishing that the Government promised, in unmistakable terms, to regulate them in a particular fashion, into the future. The Government's remaining arguments are readily rejected. The ``reserved powers'' doctrine cannot defeat a claim to recover damages for breach of contract where subsequent legislation has sought to minimize monetary risks assumed by the Government. The ``express delegation'' doctrine is satisfied here by the statutes authorizing the relevant federal bank regulatory agencies to enter into the agreements at issue. Finally, the ``sovereign acts'' doctrine adds little, if anything, to the ``unmistakability'' doctrine, and cannot be relied upon where the Government has attempted to abrogate the essential bargain of the contract. Pp. 1-6.

Souter, J., announced the judgment of the Court and delivered an opinion, in which Stevens and Breyer, JJ., joined, and in which O'Connor, J., joined except as to Parts IV-A and IV-B. Breyer, J., filed a concurring opinion. Scalia, J., filed an opinion concurring in the judgment, in which Kennedy and Thomas, JJ., joined. Rehnquist, C. J., filed a dissenting opinion, in which Ginsburg, J., joined as to Parts I, III, and IV.

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