Appropriate Source for Payment of Judgments and Settlements in United States v. Winstar Corp.

• Decision Date: 22 July 1998
• Docket Number: 98-18
• Citation: 22 Op. O.L.C. 141
• Parties: Appropriate Source for Payment of Judgments and Settlements in United States v. Winstar Corp.
• Court: Opinions of the Office of Legal Counsel of the Department of Justice

22 Op. O.L.C. 141

Appropriate Source for Payment of Judgments and Settlements in United States v. Winstar Corp.

No. 98-18

United States Department of Justice

July 22, 1998

RANDOLPH D. MOSS Acting Assistant Attorney General Office of Legal Counsel.

Appropriate Source for Payment of Judgments and Settlements in United States v. Winstar Corp.

The Federal Savings and Loan Insurance Corporation Resolution Fund is the appropriate source of payment for judgments against, and settlements by, the United States in United States v Winstar Corp and similar cases arising from the breach of certain agreements to which the Federal Savings and Loan Insurance Corporation was a party

MEMORANDUM OPINION FOR THE DEPUTY GENERAL COUNSEL DEPARTMENT OF THE TREASURY

On July 1, 1996, the Supreme Court decided United States v Winstar Corp., 518 U.S. 839 (1996). The Court held that the United States was liable in three cases for breaching contracts into which it had entered with entities that took over failing thrifts during the savings and loan crisis of the 1980's. Because the United States Court of Federal Claims ("CFC") had not yet determined the appropriate measure or amount of damages, the Supreme Court remanded for further proceedings. Id. at 910. After the Winstar decision was handed down, a large number of cases premised on identical or similar theories of relief that had been stayed pending the Supreme Court's decision were activated.^[1] We understand that in virtually all of these cases, which are currently pending before the CFC or the United States Court of Appeals for the Federal Circuit the government contests liability and/or disagrees with the plaintiffs regarding the appropriate measure or amount of damages.

You have asked for our views regarding the appropriate source for payment of judgments in the Winstar-related cases.^[2] Because the government is currently considering the possibility of settling two of the three cases that the Supreme Court considered in Winstar, as well as certain other Winstar-related cases, you have also asked for our opinion regarding the appropriate source of funds for the payment of such settlements. The appropriate source of funds for a settled case is identical to the appropriate source of funds should a judgment in that case be entered against the government. See Availability of Judgment Fund in Cases Not Involving a Money Judgment Claim, 13 Op. O.L.C. 98, 103 (1989) ("[I]n determining whether a proposed settlement is payable from the Judgment Fund, the Attorney General or his designee should examine the underlying cause of action, and decide whether the rendering of a final judgment against the United States under such a cause would have required a payment from the Judgment [ 142] Fund."); 3 Office of the General Counsel, United States General Accounting Office, Principles of Federal Appropriations Law 14-9 (2d ed. 1994) ("GAO Principles") (stating that compromise settlements have no effect on the source of funds).^[3]

Our discussion of the appropriate source of funds necessarily is premised on courts finding the government liable or on the government entering into settlements based on the risk that a court would find the government liable. We do not, however mean to suggest that we have reached any conclusions regarding the likelihood of such potential findings. We discuss cases in the context of a finding of government liability because it is only in those cases, and in settlements entered into due to the risk of such a finding, that the appropriate source of funds for the payment of judgments by the government is an issue.

We understand from the Commercial Litigation Branch of the Civil Division of the Department of Justice that, to the extent that the government has settled or is engaged in settlement negotiations in any of the Winstar-related cases, these cases involve "Assistance Agreements" or "Supervisory Action Agreements" to which the Federal Savings and Loan Insurance Corporation ("FSLIC") was a party. We have therefore limited our analysis of the appropriate source of payment for settlements or potential judgments to the Winstar-related cases in which FSLIC was a party to the underlying Assistance Agreements and Supervisory Action Agreements.^[4]

Based upon the information currently available to us, we believe that the FSLIC Resolution Fund is the appropriate source of funds to pay judgments and settlements in Winstar-related cases in which FSLIC was a party to an Assistance Agreement or Supervisory Action Agreement.^[5] Congress created the FSLIC Resolution Fund to assume, with a single statutory exception that is not relevant here, 12 U.S.C. § 1441a (1994), "all assets and liabilities of the FSLIC on the day before" FSLIC was abolished. 12 U.S.C. § 1821a(a)(2) (1994). Although the term "liabilities" is not defined in the statute, its ordinary meaning includes contingent liabilities, such as certain contractual obligations, and there is no reason to believe that Congress departed from this ordinary meaning when it created the FSLIC [ 143] Resolution Fund. Based on the Supreme Court's theory of liability in Winstar, we believe that the judgments or settlements in the Winstar-related cases in which FSLIC was a party to the underlying Assistance Agreements and Supervisory Action Agreements would qualify as "liabilities" of FSLIC under § 1821a(a)(2). Accordingly, in these cases, the potential judgments, and the settlements entered into to avoid the risk of such judgments, are payable from the FSLIC Resolution Fund. Because payment is "otherwise provided for" within the meaning of the Judgment Fund statute, the Judgment Fund is not available to pay such judgments and settlements. See 31 U.S.C. § 1304 (1994).

I. BACKGROUND

During the Great Depression, over 1, 700 savings and loans, or "thrifts, " failed because borrowers could not pay their mortgages. See H.R. Rep. No. 101-54, pt. 1, at 292 (1989), reprinted in 1989 U.S.C.C.A.N. 86, 88 ("House Report"). As a result, thrift depositors lost approximately $200 million. In response, Congress took three actions to stabilize the thrift industry. First, in 1932, Congress created the Federal Home Loan Bank Board ("Bank Board") to channel funds to thrifts to finance home mortgages and to prevent foreclosures. See Pub. L. No. 72-304, ch. 522, 47 Stat. 725 (1932) (codified as amended at 12 U.S.C.A. §§ 1421-1449 (West 1989 & Supp. 1998)). Second, Congress passed the Home Owners' Loan Act of 1933, which authorized the Bank Board to charter and to regulate federal thrifts. See Pub. L. No. 73-43, ch. 64, 48 Stat. 128, 132-34 (1933) (codified as amended at 12 U.S.C. §§ 1461-1468c (1994 & Supp. II 1996)). Finally, in 1934, Congress created the Federal Savings and Loan Insurance Corporation, "under the direction of" the Bank Board, to insure thrift deposit accounts and to regulate all federally insured thrifts to ensure that their capital is unimpaired and that their financial policies and management are "safe." See Pub. L. No. 73-479, ch. 847, 48 Stat. 1246, 1256-61 (1934) (codified as amended at 12 U.S.C.A. §§ 1701-1750g (West. 1989 & Supp. 1998)); 12 U.S.C. § 1726(c) (1988) (repealed 1989).

A. The Savings and Loan Crisis of the Early 1980's

The savings and loan crisis of the early 1980's originated from the rising interest rates of the late 1970's and early 1980's. Many thrifts were locked into long-term, low-yield, fixed-rate mortgages created when interest rates were low, and thus the high interest rates caused the thrifts to experience large operating losses as they raised savings account interest rates in an effort to attract funds from depositors. See Winstar, 518 U.S. at 845 (plurality opinion); House Report at 291, reprinted in 1989 U.S.C.C.A.N. at 87. By 1981, thrifts' mortgage portfolios were yielding ten percent, but the thrifts were paying an average of eleven percent [ 144] for their funds, and between 1981 and 1983, 435 thrifts failed. See House Report at 296, reprinted in 1989 U.S.C.C.A.N. at 92. As the federal insurer of the thrift deposits, FSLIC was responsible for liquidating the failed thrifts, if necessary, and reimbursing depositors for the insured funds they had lost. FSLIC, however, lacked adequate assets to do so. In 1985, for example, FSLIC had $4.55 billion in its insurance fund, but the Bank Board estimated that it would cost $15.8 billion to liquidate all the thrifts deemed insolvent under generally accepted accounting principles ("GAAP"). See Winstar, 518 U.S. at 847 (plurality opinion).

In response to the crisis, Congress and the executive branch extensively deregulated the thrift industry to enable thrifts to compete with other financial services providers for funds and to broaden their investment powers. See Id. at 845 (plurality opinion); House Report at 291, reprinted in 1989 U.S.C.C.A.N. at 87. In addition, the Bank Board lowered the capital requirement for thrifts from five percent to four percent of assets in 1980, and from four to three percent in 1982. See Winstar, 518 U.S. at 845-46 (plurality opinion). The capital requirement has been described as " 'the most powerful source of discipline for financial institutions.' " Id. at 845 (quoting Breeden, Thumbs on the Scale: The Role that Accounting Practices Played in the Savings and Loan Crisis, 59 Fordham L. Rev. S71, S75 (1991)). To give more leeway to the struggling thrifts, the Bank Board also promulgated new "regulatory accounting principles" that often replaced GAAP in determining whether thrifts could meet the Bank Board's capital requirement. "The reductions in required capital reserves, " the plurality explained in Winstar, "allowed thrifts to grow explosively without increasing their capital base, at the same time deregulation let them expand into...