Opinion ID: 211711
Heading Depth: 2
Heading Rank: 1

Heading: Overview of Winstar Litigation

Text: 2 This is a Winstar -related case involving claims against the government stemming from Congress' enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub.L. 101-73. FIRREA was passed as part of the government's response to the savings and loan crisis of the 1980s. Castle v. United States, 301 F.3d 1328, 1332 (Fed.Cir.2002). The circumstances surrounding the crisis in the savings and loan industry are well-documented elsewhere, United States v. Winstar Corp., 518 U.S. 839, 843-58, 116 S.Ct. 2432, 135 L.Ed.2d 964 (1996), and therefore we need not recount them in detail here. An understanding of the government's response to that crisis and the resulting litigation is, however, helpful to appreciating the issues raised by this case, so we begin with a brief overview. 3 The rise of interest rates in the 1980s caused a number of savings and loan institutions, or thrifts, to become insolvent when the interest rates they were required to pay on new deposits exceeded the income generated from existing mortgages entered into at lower rates. Castle, 301 F.3d at 1332. In response, the agency that insured thrift deposits, the Federal Savings and Loan Insurance Corporation (FSLIC), and the regulator of all federally insured thrifts, the Federal Home Loan Bank Board (FHLBB), sought private investors and healthy thrifts to take over ailing thrifts. Id. As an incentive to engage in such mergers, the FSLIC and the FHLBB routinely agreed to afford the acquiring thrifts particular regulatory treatment. Id. at 1333. 4 A commonly contracted for benefit involved the treatment of supervisory goodwill. Supervisory goodwill was generated by the excess between an ailing thrift's liabilities assumed by an acquirer and the fair value of its identifiable assets. Winstar Corp. v. United States, 64 F.3d 1531, 1536 (Fed.Cir.1995) (en banc). The FHLBB permitted the acquiring thrifts to count supervisory goodwill toward the thrift's regulatory capital requirements, despite contrary teachings under generally accepted accounting principles (GAAP). Castle, 301 F.3d at 1333. This treatment of supervisory goodwill facilitated satisfaction of the regulatory capital requirements by minimizing or eliminating the need for the acquiring thrifts to obtain additional capital infusions. Id. 5 The FHLBB and the FSLIC also used a capital credits incentive to encourage mergers with failing thrifts. The capital credits incentive involved FSLIC making a cash contribution to the merged thrift, which contribution could then be accounted for in partial satisfaction of the merged thrift's regulatory capital requirements. Winstar Corp., 64 F.3d at 1536. 6 FIRREA, which was enacted in 1989, required, among other things, that thrifts maintain core capital of at least three percent of their total assets, and prohibited counting unidentifiable intangible assets, such as supervisory goodwill, toward this capital maintenance requirement. Id. Although the statute did not directly address the treatment of capital credits, concomitant regulations required that capital credits be treated in the same manner as supervisory goodwill. Winstar, 64 F.3d at 1538. As a result of the passage of FIRREA and the promulgation of related regulations, many thrifts that were previously in full compliance with the regulations on capital requirements failed to satisfy the new capital standards and immediately became subject to seizure. Id. Thus, the Winstar litigation was spawned whereby acquirers of the failing thrifts alleged that the government's enactment and implementation of FIRREA constituted a breach of the contracts promising thrifts particular regulatory treatment. Castle, 301 F.3d at 1333.