518 U.S. 839 (1996), argued 24 Apr. 1996, decided 1 July 1996 by vote of 7 to 2; Souter for the plurality, Breyer concurring, Scalia concurring in the judgment, Rehnquist, dissenting, joined in part by Ginsburg. This complex and highly fragmented case had its genesis in the savings and loan industry debacle of the late 1970s and early 1980s. In an effort to resolve the problem of failing thrifts, the federal government induced healthy thrift institutions to acquire them by promising special accounting treatment that would permit the acquiring thrifts to claim notional “goodwill” as part of their required “regulatory capital.”
However, subsequent legislation forbidding thrifts to count goodwill toward regulatory capital made no exception for those relying on earlier promises. Winstar, for instance, was seized by regulators because it failed to meet capital requirements under the new rules. The United States court of appeals held that the promises constituted valid contracts.
In the Supreme Court, the government stressed two constitutional issues. Under the “unmistakability doctrine,” the government had to waive its sovereign power and agree to be liable for a breach of contract “in unmistakable terms.” Under the “sovereign acts” doctrine, “public” acts of government would not be deemed to modify its contractual obligations.
Justice David Souter, writing for the plurality, stated that the unmistakability doctrine was inapplicable because the United States was not waiving its sovereignty—it could enact new banking regulations and pay damages. Respecting sovereign acts, he concluded that the promise to permit acquiring thrifts to count goodwill as regulatory capital was not a public act. Furthermore, treating the government as a private contracting party, it could not show “impossibility” of performance to excuse breaching its agreement.
While nuances in the various opinions limit Winstar's clarity as precedent, the case supports the proposition that government contracts should be adjudicated under normal contract principles.
Steven J. Eagle