Savings and Loan Goodwill Cases on Remand
CRS Report for Congress
Received through the CRS Web
Savings and Loan Goodwill Cases on Remand
M. Maureen Murphy
American Law Division
This report discusses the Supreme Court’s decision in United States v. Winstar
Corporation, 518 U.S. 839, 116 S.C. 2432 (1996), in which the Court ruled that the
United States had breached contracts made by the Federal Home Loan Bank Board with
various savings and loan institutions. Before the federal courts are two separate lines of
cases claiming damages for legislation affecting agreements by regulators in the 1980's
with investors in failing thrifts as to treatment of goodwill and change in tax law. In the
goodwill cases, in December 1997, the United States Court of Federal Claims ruled
against the government on many common issues in the over 200 similar cases before that
court. In May 1998, that court ruled, on the basis of the facts of one of those cases, that
the Federal Deposit Insurance Corporation could maintain a claim against the United
States as successor to a failed institution and that private investors in that institution
would be limited to restitution damages and not expectancy damages. By July 2001,
various other rulings at the trial court level, in the Court of Federal Claims, and at the
appellate level in the Court of Appeals for the Federal Circuit, have added more
complexity to these precise issues.
Good Will Cases. Whatever the causes of the thrift crisis in the 1980's—inflation,
deregulation, poor investments, fraud—the results were that the number of troubled
institutions and failures ultimately meant insufficiency in the deposit insurance fund that
was designated to handle the thrift industry. That was the now-defunct Federal Savings
and Loan Insurance Corporation (FSLIC) fund. Without adequate funding to close down
troubled and failing institutions and pay off depositors, the fund’s regulator, the Federal
Home Loan Bank Board (FHLBB), embarked on a forbearance program to induce new
investors to purchase or merge failed thrifts. It permitted them to take advantage, over
30 or 40 years, of favorable accounting treatment for intangibles, such as goodwill, in
calculating regulatory capital. The net effect of including goodwill, which came to be
called supervisory goodwill, appears to have been that of saving the regulator or the
acquired institution from having to transfer tangible assets or cash to cover the deposit
accounts transferred in the transaction.
Congressional Research Service The Library of Congress
What was happening, therefore, was an agreement by the government to allow the
investors in failing thrifts to treat what was a deficit in the thrift’s capital as an asset. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1987 (FIRREA), Pub.
L. 101-73, 103 Stat. 183, set a twenty-year limit for phasing out supervisory goodwill. 12
U.S.C., sections 1464(t)(3)(A) and 4(t)(9)(B). It, therefore, nullified the agreements
between the investors and the government.
In Winstar, the Court decided that these agreements could be found to be binding on
the government. The government could be held liable for breach and could not assert four
defenses that might have been available in other circumstances: (1) the need for an
unmistakable waiver of sovereign authority; (2) need for an express delegation of authority
to the Federal Home Loan Bank Board to bind the government; (3) the involvement of
sovereign powers that may not be waived; and (4) the existence of a public and general
law, FIRREA, that could serve to bar a damages claim. Essentially, these were all
inapplicable because the Court did not interpret Winstar as involving a question of the
United States’ having waived its right to change conditions governing the savings and loan
industry. It had not waived the authority to enact legislation. The Court viewed the case
as involving an assertion that in making the agreements the government waived, not its
power to modify the agreements, but its power to do so without having to pay contract
damages. The Court treated these agreements as closer to ordinary, run-of-the-mill
government contracts than to regulatory orders.
There are 120 cases involving similar situations before the federal courts with total
damage claims in the $20 to $30 billion range. As of July 2001, of the 120 cases before
the trial court, only 15 have been concluded–9 dismissed and 6 settled. Five cases are on
appeal and 95 remain before the trial court, in various stages of litigation. The trial court,
the United States Court of Federal Claims, scheduled 38 of these cases for accelerated
treatment. In a December 22, 1997, opinion, California Federal Bank v. United States,
39 Fed. Cl. 753 (1997), the court ruled against the government on a series of legal issues
common to many of the cases. It charged the government with raising weak arguments
and suggested that settlement discussions should proceed. It noted the complexity of
managing these cases, with distinct factual ingredients and varied issues, and that no single
group of issues will resolve all the cases.
The Claims Court selected four cases to air representative contract defenses,
presumably to stimulate the government to soften its litigation strategy. The December
1997 decision deals with these consolidated defenses. Many of the defenses involved
alleged inconsistency reflected in the multitudinous documents and collateral agreements
that constituted the deals by which the investors were induced to take over the failing
institutions. Some of the issues were virtually identical to those raised in the Supreme
Court; others involved different factual situations—such as whether or not the fact that the
institution would have been adequately capitalized on the date of acquisition with or
without the forbearance agreements was critical to finding the existence of a contract.
After examining the issues, the court ruled for the plaintiffs and criticized the government
and its arguments. Subsequently, the government, preserving its right to appeal, filed a
motion to proceed with discovery and insisted that many of the cases involve factual
circumstances that differ from Winstar. As these cases have proceeded, the government
has argued that some of the deals were not arranged or induced by FHLBB or involve
breaches by the thrifts before FIRREA and the government’s breach.
In May 1998, in one of the Winstar cases, the Court of Federal Claims ruled that the
Federal Deposit Insurance Corporation (FDIC) could pursue its goodwill claims as
successor to a failed thrift and possibly recover damages for rights it received as assignee
of the receiver but that it could not recover for payments it made, in its corporate capacity,
to meet deficits in the receivership. Among the reasons was the avoidance of tying up the
court's docket with an intra-governmental dispute, the Treasury being the creditor of 99%
of the receivership's deficit. The court also ruled that the private plaintiffs damages claims
would be limited to restitution damages representing return on their investments.
Expectancy damages would not be allowed as they represent general damages recoverable
by the institution and, presumably, by the FDIC as its successor. Statesman Savings
Holding Corporation v. United States, 41 Fed Cl. 1 1998).
As cases are reviewed on appeal, issues as critical as whether or not to allow various
types of damages are being reexamined. In Glendale Federal Bank v. United States, 293
F. 3d 1374 (Fed. Cir. 2001), the appellate court refused to allow restitution damages,
vacated the trial court’s $909 million judgment, and remanded for a calculation of the cost
of actual reliance. It disallowed lost profits and restitution claims as being too speculative.
In California Federal Bank v. United States, 245 F. 3d 1342 (Fed. Cir. 2001), the appeals
court refused to allow restitution, as being too speculative, but found that the plaintiffs had
presented sufficient evidence to raise a factual issue as to the existence of and quantity of
lost profits. It, therefore, remanded the case for findings on the issue of lost profits.
Tax Benefits Cases. In addition to the 120 good will cases, there are at least
eight cases (according to the Wall Street Journal, July 17, 2001, B76, col. 2) involving tax
benefits available to investors who acquired failing thrifts in the late 1980's only to have
the tax provisions repealed in 1993. Like the goodwill cases, the tax benefit cases involve
agreements between investors and thrift regulators in the context of acquisition of failing
thrifts. In the tax benefit cases, the plaintiffs entered into agreements with FSLIC and the
FHLBB, providing that the regulators would reimburse them for the losses they sustained
when disposing of certain assets that they acquired in the transaction. Under provisions
of the tax law then in existence, specifically applicable to FSLIC, the acquirers could take
advantage of the tax losses and were not required to include the FSLIC reimbursement in
calculating their income. Subsequently, this tax benefit was repealed by enactment of
section 13224 of the Omnibus Budget Reconciliation Act of 1993. Pub. L. 103-66. In
Centex v. United States, 2001 U.S.Claims LEXIS 123 (July 6, 2001), a decision which
encompasses five separate cases, the Court of Federal Claims ruled that the agreements
with FSLIC were contracts and that they were breached by enactment of the 1993
legislation, thereby subjecting the United States to liability for contract damages. In
reaching the decision, the court said that the “[p]aintiffs here legitimately expected that the
covered asset loss deduction would not be eliminated through retroactive legislation
targeted specifically at assistance agreements entered into by the FSLIC and the FHLBB.
This expectation was protected by the implied covenant of good faith and fair dealing that
was contained in the Assistance Agreement.” 2001 U.S. Claims LEXIS 123. *73.
Unlike the goodwill cases, however, the tax benefit cases are at a preliminary stage
in the litigation process. The Centrex case may be appealed by the Department of Justice.
There has been no Supreme Court decision, comparable to Winstar, construing the repeal
of the particular piece of legislation in question as a breach of contract. If and when the
appellate process ends, the issue of damages awaits discovery and trial.
Funding. Costs of the litigation, damage awards, and settlement amounts, are to
be disbursed from the FSLIC Resolution Fund, and when that is exhausted, from the
Treasury, as authorized. Pub. L. 106-113, Div. B, § 1000 (a)(1), tit. I, §§ 110, 113 Stat.
1535, 1501A-20. That law further provided that litigation expenses are available under
existing authority and are to be made available as set forth in a memorandum of
understanding between the Department of Justice and the FDIC, dated October 2, 1998.
See Pub. L. No. 105-61, §32, 111 Stat. 1272, 1315 (1997); Pub. L. No. 104-208, § 638,