United States v. Winstar Corporation

PETITIONER: United States
RESPONDENT: Winstar Corporation
LOCATION: Texas General Assembly

DOCKET NO.: 95-865
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: United States Court of Appeals for the Federal Circuit

CITATION: 518 US 839 (1996)
ARGUED: Apr 24, 1996
DECIDED: Jul 01, 1996

Charles J. Cooper - Argued the cause for the respondents Winstar Corp., et al
Joe G. Hollingsworth - Argued the cause for the respondent Glendale Federal Bank
Paul Bender - Department of Justice, argued the cause for the petitioner

Facts of the case

During the savings and loan crisis of the 1980s, the Federal Home Loan Bank Board encouraged thrifts in good standing and outside investors to take over ailing thrifts in supervisory mergers. The 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. Subsequently, Congress's 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. Three thrifts, created through supervisory mergers who consequently ran into financial troubles, each filed suit against the United States for breach of contract. Agreeing with the thrifts, the District Court granted each summary judgment. The court rejected Government's arguments 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 and that a public and general sovereign act, such as FIRREA's alteration of capital reserve requirements, could not trigger contractual liability. The Court of Appeals affirmed.


Can the federal government be sued by thrifts that were sent into financial trouble when Congress changed the computation of required reserves after the Federal Home Loan Bank Board encouraged actions based on premise that the rules would not change?

Media for United States v. Winstar Corporation

Audio Transcription for Oral Argument - April 24, 1996 in United States v. Winstar Corporation

William H. Rehnquist:

We'll hear argument first this morning in Number 95-865, The United States v. Winstar Corporation.

Mr. Bender.

Paul Bender:

Mr. Chief Justice, and may it please the Court:

In 1989, Congress enacted FIRREA, the Financial Institutions Reform, Recovery and Enforcement Act in an attempt to deal with the calamity... one might more accurately say catastrophe... that had befallen the savings and loan or thrift industry in the United States during the decade of the 1980's largely because of a rise in interest rates at the beginning of the 1980's and then because of the risks that S&L owners took in order to make more money to deal with the losses that were caused by the rise in interest rates.

S&L's are invested in... were invested in long term low interest things, mortgages.

Primarily when interest rates go up their profit and loss picture tends to go down if they're stuck with those long-term debts.

During that decade, about a sixth of all the S&L's in the United States, about 500, had to either be closed or absorbed into other S&L's because they were insolvent, because they failed.

That accelerated at the end of the eighties.

About half of those failures occurred in 1987 and 1988.

The costs of that failure are enormous.

The cost in money to the insurance fund... which is in turn, was in turn mostly financed by premiums that the banks had to pay, and so when the insurance fund loses the banks have to pay more premiums, and that spirals the losses... the cost to the insurance fund was over $40 billion in those closings.

The cost in public confidence in the industry is probably even greater.

Still we are familiar with runs on banks and what that can cause, and when large numbers of institutes, one in six, have to start being closed, there is an enormous problem of possibly failing public confidence.

The public at the end of the eighties had $1.3 trillion invested in S&L's, and S&L's in turn are there because Congress put them there in order to help the housing market, and the housing industry, and make housing affordable.

Antonin Scalia:

And I gather before FIRREA was even passed, the executive branch was concerned about this problem and induced some solvent banks to take on their backs some insolvent banks in order to prevent them from failing.

Isn't that what this is all about?

Paul Bender:

It's not clear who induced whom in these transactions.

Stephen G. Breyer:

Oh, I see.

I thought they did it in order to save the Congress from having to appropriate more money to pay the depositors who would have lost money.

Paul Bender:

They did it for a number of reasons.

It was the policy of the Federal bank regulators during the 1980's to close as few banks as possible and to have them absorbed into other banks because the insurance fund had a limited amount of money, and if that money runs out, Congress either has to appropriate money, which it has very rarely done, or the premiums have to be raised on the insurances.

The fund is primarily funded by premiums that the banks pay.

The banks have to pay more premiums.

The problem that you have of losses becomes even greater.

The policy, then, was to try to keep the banks alive.

David H. Souter:

In any case, whoever induced whom by doing what these banks did, the claims on the insurance fund were drastically reduced.

They were eliminated with respect to every one of these failing banks, I take it.

Paul Bender:

That's true, for a while they were reduced--

David H. Souter:


Paul Bender:

--but the danger was created, and it happened within that decade.