Joan Bernott Maginnis and Michael Kane*

Winstar is an enormously important Supreme Court decision. It threatens to impose huge liabilities on the United States, and announces important precedent on the interpretation of Government contracts. What follows is a digest of the Court's very long ruling.

The case arose out of a series of acquisitions of failing savings and loan associations by healthier thrifts in the mid-1980's. The acquisitions were engineered by Federal bank regulators, who entered into so-called "forbearance agreements" that permitted the acquiring institutions to count the excess of the purchase price over fair value as "supervisory goodwill" in computing the capital reserves required by federal regulations. Soon after the execution of many such agreements, Congress enacted FIRREA which, among its other effects, invalidated such fictional capital reserve calculations. As a result, some of the acquiring institutions were forced to launch massive, sometimes successful recapitalization efforts; many failed outright.

Three acquiring institutions subsequently brought suit against the United States seeking monetary damages for breach of contract. On July 1, 1996, a seven-member majority of the Court held in three separate opinions that none of the proferred government defenses proscribed Government liability. 1996 U.S. LEXIS 4266. The Chief Justice, joined by Judge Ginsburg, filed a dissenting opinion.

A. Justice Souter's Plurality Opinion (with Justices Stevens, Breyer, and O'Connor in part) In Support Of Affirmance.

Justice Souter judiciously observes that the "anterior question of whether there were contracts at all...[was] not strictly before" the Court, and that the Court is "in no better position than the Federal Circuit and the Court of Federal Claims to evaluate the documentary records of the transactions at issue." Nonetheless, in "giv[ing] some consideration to the nature of the underlying transactions," Justice Souter frequently employs terms and analysis suggesting that, in fact, the Supreme Court was itself evaluating the "documentary records," and construing them to convey the referenced Governmental promises. Then...

1. In his longest subsection, Justice Souter considers the unmistakability doctrine, which provides that "`[s]overeign power...governs all contracts subject to the sovereign's jurisdiction, and will remain intact unless surrendered in unmistakable terms.'" The Government "mistakes the scope" of the unmistakability doctrine, he says, because the thrifts do not claim that the regulators bound Congress to "ossify" the law, but merely seek damages caused by the existing government failure to perform. The thrifts, he states,
   
   do not seek an injunction against application of the law to them; nor would their requested damages "amount to exemption" from the new law, or "deprive the Government of money it would otherwise be entitled to receive (as a tax rebate would)...."
   
   So long as...a contract [with the Government] is reasonably construed to include a risk-shifting component that may be enforced without effectively barring the exercise of [a] [sovereign] power, the enforcement of that risk allocation raises nothing for the unmistakability doctrine to guard against, and there is no reason to apply it.
   
   
2. Next, Justice Souter summarily disposes of the Government's argument that the regulators acted ultra vires in bargaining away Congress's power to amend the law without an express grant of delegated authority to do so. That, he states, is not the bargain in issue. A contract "to adjust the risk of subsequent legislative change does not strip the Government of its legislative sovereignty."
   
   
3. Justice Souter next rejects the Government's invocation of the "sovereign acts doctrine," that is, the argument that FIRREA's alteration of capital requirements cannot comprise a contract breach because it was a "public and general act." Here, Justice O'Connor's support for the plurality falters. She agrees with Justice Souter's coup de grace to this defense--that it cannot apply because the Government cannot demonstrate as a factual matter that "the passage of the statute rendering its performance impossible was an event contrary to the basic assumptions on which the parties agreed, and [the Government also] must ultimately show that the language or circumstances do not indicate that the Government should be liable in any case." But Justice O'Conner parts company with Justice Souter's quite extraordinary creation of a sovereign `public interest' test for determining whether legislation is truly "public and general" (and thus a genuine sovereign act within the doctrine's meaning) or, rather, "tainted by a Government object of self-relief" (and thus not a sovereign act). To apply this test, Justice Souter looked to the motives of the congressmen who enacted FIRREA, and decided that FIRREA failed it. (Justice Scalia and his two concurring colleagues, as well as the two dissenters, also reject this `public interest' test; thus, this portion of Justice Souter's analysis--and his conclusion that FIRREA fails the `public interest' test--comprises the opinion of only three members of the Court.)

B. Concurring Opinion by Justice Breyer.

On one hand, Justice Breyer agrees that the unmistakability doctrine should not shield the government "primarily for reasons explained in the plurality opinion." On the other hand, he seems to question the very existence of the doctrine, saying that it was never intended to "displace the rules of contract interpretation applicable to the Government as well as private contractors in numerous ordinary cases, and in certain unusual cases, such as this one."

C. Justice Scalia's Opinion concurring in affirmance, with Justices Thomas and Kennedy

Justice Scalia shares Justice Breyer's skepticism about the existence of the sovereign acts doctrine: "The doctrine has little if any independent legal force beyond what would be dictated by normal principles of contract interpretation." Moreover, Justice Scalia faults the plurality for disposing of three of the "sovereign" defenses merely by characterizing the contracts as "risk-shifting agreements." Apart from being unsupported by Supreme Court precedent, he writes, "it is questionable whether...the [plurality's] exercise in contract characterization...is really valid."

In Scalia's view, the sovereign acts doctrine exists, and it applies in this case, but respondent-thrifts have overcome its "reverse presumption that the government remains free to make its own performance impossible through its manner of regulation."

D. Dissenting Opinion by Chief Justice Rehnquist, joined by Justice Ginsburg

Here, the analysis is most passionate. Justice Rehnquist blasts the seven-member plurality for clouding the unmistakability doctrine and reducing the sovereign acts doctrine to a "shell." The result is to "chang[e] the status of the Government to just another private party under the law of contracts." Few elements of his associates' analyses escape the Chief Justice's scorn. Surely, he argues, the conceded existence of a "`serious contest'" about the parties' competing contract interpretations gives the unmistakability doctrine a proper role to play here. Next, he questions the workability of Justice Souter's "newly-minted distinction" between (permissible) claims for damages for breach of an implied, risk-shifting agreement, and (impermissible) claims to enjoin exercise of a sovereign act--or damages equivalent to such an exercise--or claims for an exemption from such an exercise. Why, he asks, would plaintiffs not simply dress the former claims in the latter claims' clothing?

Further, he observes, Justice Souter never explains how courts are to determine whether a particular statute is "`free of governmental self-interest,'...or `tainted by' a Government objective of `self-relief....'" "Judging from the plurality's use of comments of individual legislators" for this purpose, the Chief Justice remarks, "it would appear that the sky is the limit...." Finally, he faults both Justice Scalia and Justice Breyer for failing to make findings of fact that are necessary for the respondents to prevail under their respective theories.

*As Special Litigation Counsel and Trial Attorney at the Justice Department, Joan Bernott Maginnis and Michael Kane litigated numerous cases involving the Federal banking agencies.