Winstar Corp. v. United States

During the Great Depression of the 1930s, Congress enacted legislation and created agencies in an attempt to revive and restore public confidence in failing thrift banking institutions. These measures included the creation of the Federal Home Loan Bank Board (the Bank Board) and the Federal Savings and Loan Insurance Corporation (FSLIC). Among other things, these agencies set minimum capital reserves that thrifts were required to maintain. Thrifts that failed to comply with the capital requirements were subject to seizure and receivership, which would enable a receiver to sell or liquidate the thrift. In the late 1970s and early 1980s, high interest rates caused another crisis in the thrift market. To address this crisis without exhausting the FSLIC’s insurance fund, the Bank Board and the FSLIC provided incentives to healthy thrifts that merged with failing thrifts. These were called supervisory mergers. One of the incentives for supervisory mergers was the use of the purchase method of accounting, which was a generally accepted accounting principal. Under this method, the amount that the purchase price of the failing thrift exceeded the failing thrift’s fair market value could be considered supervisory goodwill for the merged thrift. That supervisory goodwill could in turn be used toward the merged thrift’s capital requirements. Winstar Corporation and Statesman Savings Holding Corporation (Statesman) (plaintiffs) separately acquired failing thrifts under the supervisory-merger policy. Under the merger plans, Winstar and Statesman each entered into an agreement with the FSLIC in which (1) the FSLIC contributed cash for the mergers, (2) the purchase method of accounting was used to capture supervisory goodwill to be used toward each thrift’s capital requirements, and (3) the supervisory goodwill could be amortized. Despite the Bank Board’s and the FSLIC’s efforts, thrifts continued to fail, and Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which eliminated the Bank Board and the FSLIC and greatly limited the use of supervisory goodwill towards capital requirements. Due to FIRREA’s limitation, Winstar and Statesman each fell into noncompliance with the capital requirements and were placed into receivership. Winstar and Statesman separately filed suit and argued that the government (defendant) had breached its contractual obligations by way of the FIRREA limitations. The government argued that there was no contractual obligation and that Winstar and Statesman could not interfere with Congress’s power to legislate and the agencies’ power to regulate. [Editor’s Note: The casebook excerpt details only the practices of regulators related to capital requirements and the facts of the case. Therefore, the excerpt does not provide procedural history, rule of law, issue, holding and reasoning, or disposition.]