Find Legal Information

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?

Yes. In a 7-2 plurality opinion delivered Justice David H. Souter, the Court held that the terms assigning the risk of regulatory change to the Government are enforceable and that the Government is therefore liable in damages for breach, although Congress changed the relevant law, and thereby barred the Government from specifically honoring its agreements. Justices John Paul Stevens and Stephen G. Breyer joined all of the plurality opinion, and Justice Sandra Day O'Connor joined in part. In a concurring opinion, Justice Stephen G. Breyer wrote that the unmistakability doctrine was not intended to displace the rules of contract interpretation applicable to the government. In a concurring opinion joined by Justices Anthony M. Kennedy and Clarence Thomas, Justice Antonin Scalia wrote that the contracts at issue gave rise to an obligation on the part of the government to afford the three thrifts favorable accounting treatment and the contracts were broken by the government's discontinuation of that favorable treatment. Chief Justice William H. Rehnquist dissented in an opinion joined in part by Justice Ruth Bader Ginsburg.