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
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...
- 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.
- 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."
- 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.