United States v. Winstar Corp.

1996-07-01

Headline: Federal contracts letting healthy thrifts count supervisory goodwill toward regulatory capital are enforceable; Court affirms the Government breached those promises and must pay damages, affecting banks that bought failing thrifts.

Holding: The Court held that the Government’s contracts promising to allow supervisory goodwill and capital credits to count as regulatory capital were enforceable and that the United States breached those promises, so it is liable for damages.

Real World Impact:

Lets banks recover damages when Government breaks deals on regulatory treatment.
Requires federal agencies to honor promised regulatory treatment or pay money.
May increase taxpayer exposure to payouts from breached government contracts.

Topics: bank regulation, government contracts, savings-and-loan deals, contract damages, accounting rules

Summary

Background

Three buyers — a bank called Glendale Federal, a corporate buyer called Winstar, and Statesman — agreed with federal thrift regulators in the 1980s to take over failing savings-and-loan institutions. To make the deals work, regulators allowed the buyers to record "supervisory goodwill" and capital credits as regulatory capital and to amortize them over many years. Congress later passed FIRREA, tightening capital rules and largely eliminating that treatment. The buyers sued the United States for money damages, claiming the Government had promised that treatment. Lower courts and the Federal Circuit found contracts and liability.

Reasoning

The Court addressed whether special rules for government contracts blocked the buyers' claims. It held that ordinary contract principles apply. The agreements were read as promises that allocated to the Government the risk of a later regulatory change, not as absolute limits on Congress. The Court rejected the idea that the Government can avoid money damages by invoking a general regulatory law. It also found the agencies had authority to make the commitments and that the change in law was foreseeable but did not excuse the Government because the contracts allocated that risk.

Real world impact

Buyers that made deals with federal regulators can recover money if the Government later changes the rules. Federal agencies must be careful when promising special regulatory treatment. Taxpayers could shoulder some payouts because the United States is the defendant. The decision sends disputes like these back to the trial court to calculate damages; the Court did not set dollar awards itself.

Dissents or concurrances

Justices Breyer and Scalia wrote separate opinions explaining different legal paths to the same result. The Chief Justice dissented, arguing the Court should have applied traditional limits on suits that affect sovereign regulatory power.