The Thrift Crisis and the Constitution (1996)

In August 1995, the United States Court of Appeals for the Federal Circuit decided Winstar Corp. v. United States.' That case held that the federal government breached contracts with a number of thrift institutions when Congress, in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA),2 abrogated the right of the institutions to take into account when computing their capital position for purposes of federal rules that require depository institutions to maintain their capital at certain specified minimum levels.3 Winstar, together with other cases pending in the United States Claims Court that raise the same issue, has substantial financial implications for the federal government and the affected institutions; estimates of the total amount at stake range from $12 to $15 billion.4 The Winstar decision centered on contract issues posed by the case. The court held that the government had entered into contracts with the thrifts, that those contracts had conferred on the thrifts a continuing right to include supervisory goodwill in capital, and that the statutory enactment of FIRREA constituted a breach of the contracts.5 Earlier decisions of the federal courts of appeals had held that the thrifts had no right to injunctive relief because the statute and legislative history suggested that Congress had intended to abrogate the agreements.6 In those cases, the thrifts contended that the congressional action amounted to a taking of property without due process of law. For the most part, the early courts of appeals decisions refused to decide this question on the jurisdictional ground that the question belonged before the United States Claims Court.7 The Claims Court, when faced with the issue, also refused to decide the constitutional question, finding the nonconstitutional breach-of-contract ground an adequate basis for decision.8 In affirming the Claims Court decisions, the Federal Circuit largely followed the lower court opinions. In the immediate aftermath of the Winstar decision, lawyers familiar with the issue and the industry agreed that the result reached was sound and expressed the expectation that the thrifts ultimately would prevail.9 A number of uncertainties, however, remain. The Supreme Court has granted certiorari in the case.10There are reports that Congress may respond in ways that will defeat or limit the rights of the thrifts to recover on the There is considerable question concerning the source of funds to satisfy the judgments. In theory, the amounts should come from the Judgment Fund, but legislation has been introduced to pay damages from the funds of the Resolution Trust Corporation, in part in an effort to ensure an accurate historical record of the true cost of the thrift industry bailout of the late 1980s and early 1990s.'2 Should the thrifts ultimately prevail, complex questions lurk in the future concerning the entitlement of bondholders or other claimants to amounts received by the thrifts or by their shareholders pursuant to the court rulings. Furthermore, although industry lawyers publicly express the view that the decision is a sound one, there remain substantial questions, not necessarily about the result reached in the case, but about its rationale and, in particular, its abstention from resolving the constitutional takings question. For in the cases, the action of the government to which the thrifts pointed as the source of their rights was not a specific contractual arrangement with any government body, but rather the regulators' action in approving a transaction involving the thrift, ordinarily a conversion of a mutual thrift into a stock thrift or an acquisition of one institution by another.'3 The by the government was thus an undertaking in a regulatory role and not an undertaking in a proprietary role or any other role as a contracting body. The congressional action at issue in the cases, therefore, was only a change in regulations, overriding a prior change in the position of the regulators. …