|
The Supreme Court ruled on July 1, 1996, that the government can be held liable for a rule change that plunged savings and loans into financial trouble. The 7-2 ruling said the government broke its contracts with three S&Ls when it changed an accounting rule in 1989. The law that sought to restore the troubled thrift industry to health by tightening rules and providing over $100 billion to close insolvent S&Ls. Until then, the government had encouraged healthy thrifts to take over insolvent ones by letting them count the insolvent S&L's losses as ''goodwill'' assets. S&Ls also were allowed to double-count as ''capital credit'' government funds provided to help them take over ailing thrifts. But the 1989 law said S&Ls no longer could count such assets toward their minimum capital requirements. The rule change forced many previously healthy S&Ls into the red. A number of them sued, including Winstar Corp. of Minnesota, Statesman Savings Holding Group of Iowa and Glendale Federal Bank of California.
SUPREME COURT OF THE UNITED STATES
Syllabus
UNITED STATES
v.
WINSTAR CORP. ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE FEDERAL CIRCUIT
No. 95-865. Argued April 24, 1996-Decided July 1, 1996
Realizing that the Federal Savings and Loan Insurance Corporation
(FSLIC) lacked the funds to liquidate all of the failing thrifts during
the savings and loan crisis of the 1980's, the Federal Home Loan
Bank Board encouraged healthy thrifts and outside investors to take
over ailing thrifts in a series of "supervisory mergers." As
inducement, the Bank 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. Congress's subsequent 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. Respondents are three thrifts
created by way of supervisory mergers. Two of them were seized and
liquidated by federal regulators for failure to meet FIRREA's capital
requirements, and the third avoided seizure through a private
recapitalization. Believing that the Bank Board and FSLIC had
promised that they could count supervisory goodwill toward
regulatory capital requirements, respondents each filed suit against the
United States in the Court of Federal Claims, seeking damages for,
inter alia, breach of contract. In granting each respondent summary
judgment, the court held that the Government had breached its
contractual obligations, and rejected the Government's
``unmistakability defense''--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, see Bowen
v. Public Agencies Opposed to Social Security Entrapment, 477 U. S.
41, 52--and its ``sovereign act defense--that a ``public and general''
sovereign act, such as FIRREA's alteration of capital reserve
requirements, could not trigger contractual liability, see Horowitz v.
United States, 267 U. S. 458, 461. The cases were consolidated, and
the en banc Federal Circuit ultimately affirmed.
Held: The judgment is affirmed, and the case is remanded. 64 F. 3d
1531, affirmed and remanded.
JUSTICE SOUTER, joined by JUSTICE STEVENS, JUSTICE
O'CONNOR, and JUSTICE BREYER, concluded in Parts II, III, IV,
and IV-C, that the United States is liable to respondents for breach of
contract. Pp. 19-57; 66-72.
(a) There is no reason to question the Federal Circuit's conclusion that
the Government had express contractual obligations to permit
respondents to use goodwill and capital credits in computing their
regulatory capital reserves. When the law as to capital requirements
changed, the Government was unable to perform its promises and
became liable for breach under ordinary contract principles. Pp. 19-
30.
(b) The unmistakability doctrine is not implicated here because
enforcement of the contractual obligation alleged would not block the
Government's exercise of a sovereign power. The courts below did
not construe these contracts as binding the Government's exercise of
authority to modify its regulation of thrifts, and there has been no
demonstration that awarding damages for breach would be tantamount
to such a limitation. They read the contracts as solely risk-shifting
agreements, and respondents seek nothing more than the benefit of
promises by the Government to insure them against any losses arising
from future regulatory change. Applying the unmistakability doctrine
to such contracts would not only represent a conceptual expansion of
the doctrine beyond its historical and practical warrant, but would
compromise the Government's practical capacity to make contracts,
which is "of the essence of sovereignty" itself, United States v.
Bekins, 304 U. S. 27, 51-52. Pp. 31-48.
(c) The answer to the Government's unmistakability argument also
meets its two related ultra vires contentions: that, under the reserved
powers doctrine, Congress's power to change the law in the future
was an essential attribute of its sovereignty that the Bank Board and
FSLIC had no authority to bargain away; and that in any event no
such authority can be conferred without an express delegation to that
effect. A contract to adjust the risk of subsequent legislative change
does not strip the Government of its legislative sovereignty, and the
contracts did not surrender the Government's sovereign power to
regulate. And there is no serious question that FSLIC (and the Bank
Board acting through it) lacked authority to guarantee respondents
against losses arising from subsequent regulatory changes. Pp. 49-
52.
(d) The facts of this case do not warrant application of the sovereign
act doctrine. That doctrine balances the Government's need for
freedom to legislate with its obligation to honor its contracts by asking
whether the sovereign act is properly attributable to the Government as
contractor. If the answer is no, the Government's defense to liability
depends on whether that act would otherwise release the Government
from liability under ordinary contract principles. Pp. 52-57.
(e) Even if FIRREA were to qualify as a "public and general" act, the
sovereign act doctrine cannot excuse the Government's breach here.
Since the object of the doctrine is to place the Government as
contractor on par with a private contractor in the same circumstances,
Horowitz v. United States, 267 U. S., at 461, the Government, like
any other defending party in a contract action, must show that passage
of the statute rendering its performance impossible was an event
contrary to the basic assumptions on which the parties agreed, and,
ultimately, that the language or circumstances do not indicate that the
Government should be liable in any case. The Government has not
satisfied these conditions. There is no doubt that some changes in the
regulatory structure governing thrift capital reserves were both
foreseeable and likely when the parties contracted with the
Government. In addition, any governmental contract that not only
deals with regulatory change but allocates the risk of its occurring
will, by definition, fail the further condition of a successful
impossibility defense, for it will indeed indicate that the parties'
agreement was not meant to be rendered nugatory by a change in the
regulatory law. That the Bank Board and FSLIC could not
themselves preclude Congress from changing the regulatory rules
does not stand in the way of concluding that those agencies assumed
the risk of such change, for determining the consequences of legal
change was the point of the agreements. Pp. 66-72.
JUSTICE SOUTER, joined by JUSTICE STEVENS and JUSTICE
BREYER, concluded in Parts IV-A and IV-B, that, since the
Government should not be excused by legislation when the substantial
effect of regulation was to help itself out of improvident agreements, it
is impossible to attribute the exculpatory "public and general"
character to FIRREA. That statute not only had the purpose of
eliminating the very accounting "gimmicks" that acquiring thrifts had
been promised, but the congressional debates indicate Congress's
expectation, which there is no reason to question, that FIRREA would
have a substantial effect on the Government's contractual obligations.
The evidence of Congress's intense concern with contracts like those
at issue is not neutralized by the fact that FIRREA did not formally
target particular transactions or by FIRREA's broad purpose to
advance the general welfare. Pp. 58-65.
JUSTICE SCALIA, joined by JUSTICE KENNEDY and JUSTICE
THOMAS, agreed that the Government was contractually obligated to
afford respondents favorable accounting treatment, and violated its
obligations when it discontinued that treatment under FIRREA. The
Government's sovereign defenses cannot be avoided by characterizing
its obligations as not entailing a limitation on the exercise of sovereign
power; that approach, although adopted by the plurality, is novel and
fails to acknowledge that virtually every contract regarding future
conduct operates as an assumption of liability in the event of
nonperformance. Accordingly, it is necessary to address the
Government's various sovereign defenses, particularly its invocation
of the ``unmistakability'' doctrine. That doctrine simply embodies the
common-sense presumption that governments do not ordinarily agree
to curtail their sovereign or legislative powers. Respondents have
overcome that presumption here in establishing that the Government
promised, in unmistakable terms, to regulate them in a particular
fashion, into the future. The Government's remaining arguments are
readily rejected. The ``reserved powers'' doctrine cannot defeat a
claim to recover damages for breach of contract where subsequent
legislation has sought to minimize monetary risks assumed by the
Government. The ``express delegation'' doctrine is satisfied here by
the statutes authorizing the relevant federal bank regulatory agencies to
enter into the agreements at issue. Finally, the ``sovereign acts''
doctrine adds little, if anything, to the ``unmistakability'' doctrine, and
cannot be relied upon where the Government has attempted to
abrogate the essential bargain of the contract. Pp. 1-6.
SOUTER, J., announced the judgment of the Court and delivered an
opinion, in which STEVENS and BREYER, JJ., joined, and in which
O'CONNOR, J., joined except as to Parts IV-A and IV-B. BREYER,
J., filed a concurring opinion. SCALIA, J., filed an opinion
concurring in the judgment, in which KENNEDY and THOMAS, JJ.,
joined. REHNQUIST, C. J., filed a dissenting opinion, in which
GINSBURG, J., joined as to Parts I, III, and IV.
NOTICE: This opinion is subject to formal revision before publication
in the preliminary print of the United States Reports. Readers are
requested to notify the Reporter of Decisions, Supreme Court of the
United States, Washington, D.C. 20543, of any typographical or
other formal errors, in order that corrections may be made before the
preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
No. 95-865
UNITED STATES, PETITIONER
v.
WINSTAR CORPORATION ET AL.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE FEDERAL CIRCUIT
[July 1, 1996]
JUSTICE SOUTER announced the judgment of the Court and
delivered an opinion, in which JUSTICE STEVENS and JUSTICE
BREYER join, and in which JUSTICE O'CONNOR joins except as
to Parts IV-A and IV-B.
The issue in this case is the enforceability of contracts between the
Government and participants in a regulated industry, to accord them
particular regulatory treatment in exchange for their assumption of
liabilities that threatened to produce claims against the Government as
insurer. Although Congress subsequently changed the relevant law,
and thereby barred the Government from specifically honoring its
agreements, we hold 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.
We said in Fahey v. Mallonee, 332 U. S. 245, 250 (1947), that
"[b]anking is one of the longest regulated and most closely supervised
of public callings." That is particularly true of the savings and loan,
or "thrift," industry, which has been described as "a federally-
conceived and assisted system to provide citizens with affordable
housing funds." H. R. Rep. No. 101-54, pt. 1, p. 292 (1989).
Because the contracts at issue in today's case arise out of the National
Government's efforts over the last decade and a half to preserve that
system from collapse, we begin with an overview of the history of
federal savings and loan regulation.
The modern savings and loan industry traces its origins to the Great
Depression, which brought default on 40 percent of the Nation's $20
billion in home mortgages and the failure of some 1700 of the nation's
approximately 12,000 savings institutions. House Report, at 292-293.
In the course of the debacle, Congress passed three statutes meant to
stabilize the thrift industry. The Federal Home Loan Bank Act created
the Federal Home Loan Bank Board (Bank Board), which was
authorized to channel funds to thrifts for loans on houses and for
preventing foreclosures on them. Ch. 522, 47 Stat. 725 (1932)
(codified as amended at 12 U. S. C. Sections 1421-1449 (1988 ed.));
see also House Report, at 292. Next, the Home Owners' Loan Act of
1933 authorized the Bank Board to charter and regulate federal
savings and loan associations. Ch. 64, 48 Stat. 128 (1933) (codified
as amended at 12 U. S. C. Sections 1461-1468 (1988 ed.)). Finally,
the National Housing Act created the Federal Savings and Loan
Insurance Corporation (FSLIC), under the Bank Board's authority,
with responsibility to insure thrift deposits and regulate all federally
insured thrifts. Ch. 847, 48 Stat. 1246 (1934) (codified as amended at
12 U. S. C. Sections 1701-1750g (1988 ed.)).
The resulting regulatory regime worked reasonably well until the
combination of high interest rates and inflation in the late 1970's and
early 1980's brought about a second crisis in the thrift industry.
Many thrifts found themselves holding long-term, fixed-rate
mortgages created when interest rates were low; when market rates
rose, those institutions had to raise the rates they paid to depositors in
order to attract funds. See House Report, at 294-295. When the costs
of short-term deposits overtook the revenues from long-term
mortgages, some 435 thrifts failed between 1981 and 1983. House
Report, at 296; see also General Accounting Office, Thrift Industry:
Forbearance for Troubled Institutions 1982-1986, p. 9 (May 1987)
(GAO, Forbearance for Troubled Institutions) (describing the origins
of the crisis).
The first federal response to the rising tide of thrift failures was
"extensive deregulation," including "a rapid expansion in the scope of
permissible thrift investment powers and a similar expansion in a
thrift's ability to compete for funds with other financial services
providers." House Report, at 291; see also id., at 295-297; Breeden,
Thumbs on the Scale: The Role that Accounting Practices Played in
the Savings and Loan Crisis, 59 Fordham L. Rev. S71, S72-S74
(1991) (describing legislation permitting nonresidential real estate
lending by thrifts and deregulating interest rates paid to thrift
depositors).1 Along with this deregulation came moves to weaken
the requirement that thrifts maintain adequate capital reserves as a
cushion against losses, see 12 CFR Section 563.13 (1981), a
requirement that one commentator described as "the most powerful
source of discipline for financial institutions." Breeden, supra, at S75.
The result was a drop in capital reserves required by the Bank Board
from five to four percent of assets in November 1980, see 45 Fed.
Reg. 76111, and to three percent in January of 1982, see 47 Fed.
Reg. 3543; at the same time, the Board developed new "regulatory
accounting principles" (RAP) that in many instances replaced
generally accepted accounting principles (GAAP) for purposes of
determining compliance with its capital requirements.2 According to
the House Banking Committee, "[t]he use of various accounting
gimmicks and reduced capital standards masked the worsening
financial condition of the industry, and the FSLIC, and enabled many
weak institutions to continue operating with an increasingly inadequate
cushion to absorb future losses." House Report, at 298. The
reductions in required capital reserves, moreover, allowed thrifts to
grow explosively without increasing their capital base, at the same
time deregulation let them expand into new (and often riskier) fields of
investment. See Note, Causes of the Savings and Loan Debacle, 59
Fordham L. Rev. S301, S311 (1991); Breeden, supra, at S74-S75.
While the regulators tried to mitigate the squeeze on the thrift industry
generally through deregulation, the multitude of already-failed savings
and loans confronted FSLIC with deposit insurance liabilities that
threatened to exhaust its insurance fund. See Olympic Federal
Savings and Loan Assn. v. Director, Office of Thrift Supervision,
732 F. Supp. 1183, 1185 (DC 1990). According to the General
Accounting Office, FSLIC's total reserves declined from $6.46 billion
in 1980 to $4.55 billion in 1985, GAO, Forbearance for Troubled
Institutions 12, when the Bank Board estimated that it would take
$15.8 billion to close all institutions deemed insolvent under generally
accepted accounting principles. General Accounting Office, Troubled
Financial Institutions: Solutions to the Thrift Industry Problem 108
(Feb. 1989) (GAO, Solutions to the Thrift Industry Problem). By
1988, the year of the last transaction involved in this case, FSLIC was
itself insolvent by over $50 billion. House Report, at 304. And by
early 1989, the GAO estimated that $85 billion would be needed to
cover FSLIC's responsibilities and put it back on the road to fiscal
health. GAO, Solutions to the Thrift Industry Problem 43. In the
end, we now know, the cost was much more even than that. See,
e.g., Horowitz, The Continuing Thrift Bailout, Investor's Business
Daily, Feb. 1, 1996, p. A1 (reporting an estimated $140 billion total
public cost of the S&L crisis through 1995).
Realizing that FSLIC lacked the funds to liquidate all of the failing
thrifts, the Bank Board chose to avoid the insurance liability by
encouraging healthy thrifts and outside investors to take over ailing
institutions in a series of "supervisory mergers." See GAO, Solutions
to the Thrift Industry Problem 52; L. White, The S&L Debacle: Public
Policy Lessons for Bank and Thrift Regulation 157 (1991) (White).3
Such transactions, in which the acquiring parties assumed the
obligations of thrifts with liabilities that far outstripped their assets,
were not intrinsically attractive to healthy institutions; nor did FSLIC
have sufficient cash to promote such acquisitions through direct
subsidies alone, although cash contributions from FSLIC were often
part of a transaction. See M. Lowy, High Rollers: Inside the Savings
and Loan Debacle 37 (1991) (Lowy). Instead, the principal
inducement for these supervisory mergers was an understanding that
the acquisitions would be subject to a particular accounting treatment
that would help the acquiring institutions meet their reserve capital
requirements imposed by federal regulations. See Investigation of
Lincoln Savings & Loan Assn.: Hearing Before the House Committee
on Banking, Finance, and Urban Affairs, 101st Cong., 1st Sess., pt.
5, p. 447 (1989) (testimony of M. Danny Wall, Director, Office of
Thrift Supervision) (noting that acquirers of failing thrifts were
allowed to use certain accounting methods "in lieu of [direct] federal
financial assistance").
Under Generally Accepted Accounting Principles (GAAP) there are
circumstances in which a business combination may be dealt with by
the "purchase method" of accounting. See generally R. Kay & D.
Searfoss, Handbook of Accounting and Auditing 23-21 to 23-40 (2d
ed. 1989) (describing the purchase method); Accounting Principles
Board Opinion No. 16 (1970) (establishing rules as to what method
must be applied to particular transactions). The critical aspect of that
method for our purposes is that it permits the acquiring entity to
designate the excess of the purchase price over the fair value of all
identifiable assets acquired as an intangible asset called "goodwill."
Id., Paragraph 11, p. 284; Kay & Searfoss, supra, at 23-38.4 In the
ordinary case, the recognition of goodwill as an asset makes sense: a
rational purchaser in a free market, after all, would not pay a price for
a business in excess of the value of that business's assets unless there
actually were some intangible "going concern" value that made up the
difference. See Lowy 39.5 For that reason, the purchase method is
frequently used to account for acquisitions, see A. Phillips, J. Butler,
G. Thompson, & R. Whitman, Basic Accounting for Lawyers 121
(4th ed. 1988), and GAAP expressly contemplated its application to at
least some transactions involving savings and loans. See Financial
Accounting Standards Board Interpretation No. 9 (1976). Goodwill
recognized under the purchase method as the result of an FSLIC-
sponsored supervisory merger was generally referred to as
"supervisory goodwill."
Recognition of goodwill under the purchase method was essential to
supervisory merger transactions of the type at issue in this case.
Because FSLIC had insufficient funds to make up the difference
between a failed thrift's liabilities and assets, the Bank Board had to
offer a "cash substitute" to induce a healthy thrift to assume a failed
thrift's obligations. Former Bank Board Chairman Richard Pratt put it
this way in testifying before Congress:
"The Bank Board . . . . did not have sufficient resources to close all
insolvent institutions, [but] at the same time, it had to consolidate the
industry, move weaker institutions into stronger hands, and do
everything possible to minimize losses during the transition period.
Goodwill was an indispensable tool in performing this task." Savings
and Loan Policies in the Late 1970's and 1980's: Hearings Before the
House Committee on Banking, Finance, and Urban Affairs, 101st
Cong., 2d Sess., No. 101-176, p. 227 (1990).6
Supervisory goodwill was attractive to healthy thrifts for at least two
reasons. First, thrift regulators let the acquiring institutions count
supervisory goodwill toward their reserve requirements under 12 CFR
Section 563.13 (1981). This treatment was, of course, critical to
make the transaction possible in the first place, because in most cases
the institution resulting from the transaction would immediately have
been insolvent under federal standards if goodwill had not counted
toward regulatory net worth. From the acquiring thrift's perspective,
however, the treatment of supervisory goodwill as regulatory capital
was attractive because it inflated the institution's reserves, thereby
allowing the thrift to leverage more loans (and, it hoped, make more
profits). See White 84; cf. Breeden, 59 Fordham L. Rev., at S75-
S76 (explaining how loosening reserve requirements permits asset
expansion).
A second and more complicated incentive arose from the decision by
regulators to let acquiring institutions amortize the goodwill asset over
long periods, up to the forty-year maximum permitted by GAAP, see
Accounting Principles Board Opinion No. 17, Paragraph 29, p. 340
(1970). Amortization recognizes that intangible assets such as
goodwill are useful for just so long; accordingly, a business must
"write down" the value of the asset each year to reflect its waning
worth. See Kay & Searfoss, supra, at 15-36 to 15-37; Accounting
Principles Board Opinion No. 17, supra, Paragraph 27, at 339-340.7
The amount of the write down is reflected on the business's income
statement each year as an operating expense. See generally E. Faris,
Accounting and Law in a Nutshell Section 12.2(q) (1984) (describing
amortization of goodwill). At the same time that it amortizes its
goodwill asset, however, an acquiring thrift must also account for
changes in the value of its loans, which are its principal assets. The
loans acquired as assets of the failed thrift in a supervisory merger
were generally worth less than their face value, typically because they
were issued at interest rates below the market rate at the time of the
acquisition. See Black, Ending Our Forebearers' Forbearances:
FIRREA and Supervisory Goodwill, 2 Stan. L. & Policy Rev. 102,
104-105 (1990). This differential or "discount," J. Rosenberg,
Dictionary of Banking and Financial Services 233 (2d ed. 1985),
appears on the balance sheet as a "contra-asset" account, or a
deduction from the loan's face value to reflect market valuation of the
asset, R. Estes, Dictionary of Accounting 29 (1981). Because loans
are ultimately repaid at face value, the magnitude of the discount
declines over time as redemption approaches; this process, technically
called "accretion of discount," is reflected on a thrift's income
statement as a series of capital gains. See Rosenberg, supra, at 9;
Estes, supra, at 39-40.
The advantage in all this to an acquiring thrift depends upon the fact
that accretion of discount is the mirror image of amortization of
goodwill. In the typical case, a failed thrift's primary assets were
long-term mortgage loans that earned low rates of interest and
therefore had declined in value to the point that the thrift's assets no
longer exceeded its liabilities to depositors. In such a case, the
disparity between assets and liabilities from which the accounting
goodwill was derived was virtually equal to the value of the discount
from face value of the thrift's outstanding loans. See Black, 2 Stan.
L. & Policy Rev., at 104-105. Thrift regulators, however, typically
agreed to supervisory merger terms that allowed acquiring thrifts to
accrete the discount over the average life of the loans (approximately
seven years), see id., at 105, while permitting amortization of the
goodwill asset over a much longer period. Given that goodwill and
discount were substantially equal in overall values, the more rapid
accrual of capital gain from accretion resulted in a net paper profit over
the initial years following the acquisition. See ibid.; Lowy 39-40.8
The difference between amortization and accretion schedules thus
allowed acquiring thrifts to seem more profitable than they in fact
were.
Some transactions included yet a further inducement, described as a
"capital credit." Such credits arose when FSLIC itself contributed
cash to further a supervisory merger and permitted the acquiring
institution to count the FSLIC contribution as a permanent credit to
regulatory capital. By failing to require the thrift to subtract this
FSLIC contribution from the amount of supervisory goodwill
generated by the merger, regulators effectively permitted double
counting of the cash as both a tangible and an intangible asset. See,
e.g., Transohio Savings Bank v. Director, Office of Thrift
Supervision, 967 F. 2d 598, 604 (CADC 1992). Capital credits thus
inflated the acquiring thrift's regulatory capital and permitted
leveraging of more and more loans.
As we describe in more detail below, the accounting treatment to be
accorded supervisory goodwill and capital credits was the subject of
express arrangements between the regulators and the acquiring
institutions. While the extent to which these arrangements constituted
a departure from prior norms is less clear, an acquiring institution
would reasonably have wanted to bargain for such treatment.
Although GAAP demonstrably permitted the use of the purchase
method in acquiring a thrift suffering no distress, the relevant thrift
regulations did not explicitly state that intangible goodwill assets
created by that method could be counted toward regulatory capital. See
12 CFR Section 563.13(a)(3) (1981) (permitting thrifts to count as
reserves any "items listed in the definition of net worth"); 12 CFR
Section 561.13 (1981) (defining "net worth" as "the sum of all reserve
accounts . . . , retained earnings, permanent stock, mutual capital
certificates..., and any other non-withdrawable accounts of an insured
institution").9 Indeed, the rationale for recognizing goodwill stands
on its head in a supervisory merger: ordinarily, goodwill is recognized
as valuable because a rational purchaser would not pay more than
assets are worth; here, however, the purchase is rational only because
of the accounting treatment for the shortfall. See Black, supra, at 104
("GAAP's treatment of goodwill . . . assumes that buyers do not
overpay when they purchase an S&L"). In the end, of course, such
reasoning circumvented the whole purpose of the reserve
requirements, which was to protect depositors and the deposit
insurance fund. As some in Congress later recognized, "[g]oodwill is
not cash. It is a concept, and a shadowy one at that. When the
Federal Government liquidates a failed thrift, goodwill is simply no
good. It is valueless. That means, quite simply, that the taxpayer
picks up the tab for the shortfall." 135 Cong. Rec. 11795 (1989)
(Rep. Barnard); see also White 84 (acknowledging that in some
instances supervisory goodwill "involved the creation of an asset that
did not have real value as protection for the FSLIC"). To those with
the basic foresight to appreciate all this, then, it was not obvious that
regulators would accept purchase accounting in determining
compliance with regulatory criteria, and it was clearly prudent to get
agreement on the matter.
The advantageous treatment of amortization schedules and capital
credits in supervisory mergers amounted to more clear-cut departures
from GAAP and, hence, subjects worthy of agreement by those
banking on such treatment. In 1983, the Financial Accounting
Standards Board (the font of GAAP) promulgated Statement of
Financial Accounting Standards No. 72, which applied specifically to
the acquisition of a savings and loan association. SFAS 72 provided
that "[i]f, and to the extent that, the fair value of liabilities assumed
exceeds the fair value of identifiable assets acquired in the acquisition
of a banking or thrift institution, the unidentifiable intangible asset
recognized generally shall be amortized to expense by the interest
method over a period no longer than the discount on the long-term
interest-bearing assets acquired is to be recognized as interest
income." Accounting Standards, Original Pronouncements (July
1973-June 1, 1989), p. 725. In other words, SFAS 72 eliminated any
doubt that the differential amortization periods on which acquiring
thrifts relied to produce paper profits in supervisory mergers were
inconsistent with GAAP. SFAS 72 also barred double-counting of
capital credits by requiring that financial assistance from regulatory
authorities must be deducted from the cost of the acquisition before the
amount of goodwill is determined. SFAS 72, Paragraph 9.10 Thrift
acquirers relying on such credits, then, had every reason for concern
as to the continued availability of the RAP in effect at the time of these
transactions.
Although the results of the forbearance policy, including the
departures from GAAP, appear to have been mixed, see GAO,
Forbearance for Troubled Institutions 4, it is relatively clear that the
overall regulatory response of the early and mid-1980's was
unsuccessful in resolving the crisis in the thrift industry. See, e.g.,
Transohio Savings Bank, 967 F. 2d, at 602 (concluding that
regulatory measures "actually aggravat[ed] the decline"). As a result,
Congress enacted the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, 103 Stat. 183,
with the objects of preventing the collapse of the industry, attacking
the root causes of the crisis, and restoring public confidence.
FIRREA made enormous changes in the structure of federal thrift
regulation by (1) abolishing FSLIC and transferring its functions to
other agencies; (2) creating a new thrift deposit insurance fund under
the Federal Deposit Insurance Corporation (FDIC); (3) replacing the
Bank Board with the Office of Thrift Supervision (OTS), a Treasury
Department office with responsibility for the regulation of all federally
insured savings associations; and (4) establishing the Resolution Trust
Corporation (RTC) to liquidate or otherwise dispose of certain closed
thrifts and their assets. See note following 12 U. S. C. Section 1437,
Sections 1441a, 1821. More importantly for the present case,
FIRREA also obligated OTS to "prescribe and maintain uniformly
applicable capital standards for savings associations" in accord with
strict statutory requirements. 12 U. S. C. Section 1464(t)(1)(A).11
In particular, the statute required thrifts to "maintain core capital in an
amount not less than 3 percent of the savings association's total
assets," 12 U. S. C. Section 1464(t)(2)(A), and defined "core capital"
to exclude "unidentifiable intangible assets," 12 U. S. C. Section
1464(t)(9)(A), such as goodwill. Although the reform provided a
"transition rule" permitting thrifts to count "qualifying supervisory
goodwill" toward half the core capital requirement, this allowance was
phased out by 1995. 12 U. S. C. Section 1464(t)(3)(A). According
to the House Report, these tougher capital requirements reflected a
congressional judgment that "[t]o a considerable extent, the size of the
thrift crisis resulted from the utilization of capital gimmicks that
masked the inadequate capitalization of thrifts." House Report, at 310.
The impact of FIRREA's new capital requirements upon institutions
that had acquired failed thrifts in exchange for supervisory goodwill
was swift and severe. OTS promptly issued regulations implementing
the new capital standards along with a bulletin noting that FIRREA
"eliminates [capital and accounting] forbearances" previously granted
to certain thrifts. Office of Thrift Supervision, Capital Adequacy:
Guidance on the Status of Capital and Accounting Forbearances and
Capital Instruments held by a Deposit Insurance Fund, Thrift Bulletin
No. 38-2, Jan. 9, 1990. OTS accordingly directed that "[a]ll savings
associations presently operating with these forbearances... should
eliminate them in determining whether or not they comply with the
new minimum regulatory capital standards." Ibid. Despite the
statute's limited exception intended to moderate transitional pains,
many institutions immediately fell out of compliance with regulatory
capital requirements, making them subject to seizure by thrift
regulators. See Black, 2 Stan. L. & Policy Rev., at 107 ("FIRREA's
new capital mandates have caused over 500 S&Ls... to report that
they have failed one or more of the three capital requirements").
This case is about the impact of FIRREA's tightened capital
requirements on three thrift institutions created by way of supervisory
mergers. Respondents Glendale Federal Bank, FSB, Winstar
Corporation, and The Statesman Group, Inc. acquired failed thrifts in
1981, 1984, and 1988, respectively. After the passage of FIRREA,
federal regulators seized and liquidated the Winstar and Statesman
thrifts for failure to meet the new capital requirements. Although the
Glendale thrift also fell out of regulatory capital compliance as a result
of the new rules, it managed to avoid seizure through a massive
private recapitalization. Believing that the Bank Board and FSLIC had
promised them that the supervisory goodwill created in their merger
transactions could be counted toward regulatory capital requirements,
respondents each filed suit against the United States in the Court of
Federal Claims, seeking monetary damages on both contractual and
constitutional theories. That court granted respondents' motions for
partial summary judgment on contract liability, finding in each case
that the Government had breached contractual obligations to permit
respondents to count supervisory goodwill and capital credits toward
their regulatory capital requirements. See Winstar Corp. v. United
States, 21 Cl. Ct. 112 (1990) (Winstar I) (finding an implied-in-fact
contract but requesting further briefing on contract issues); 25 Cl. Ct.
541 (1992) (Winstar II) (finding contract breached and entering
summary judgment on liability); Statesman Savings Holding Corp. v.
United States, 26 Cl. Ct. 904 (1992) (granting summary judgment on
liability to Statesman and Glendale). In so holding, the Court of
Federal Claims rejected two central defenses asserted by the
Government: that the Government could not be held to a promise to
refrain from exercising its regulatory authority in the future unless that
promise was unmistakably clear in the contract, Winstar I, 21 Cl. Ct.,
at 116; Winstar II, 25 Cl. Ct., at 544-549; Statesman, 26 Cl. Ct., at
919-920, and that the Government's alteration of the capital reserve
requirements in FIRREA was a sovereign act that could not trigger
contractual liability, Winstar II, 25 Cl. Ct., at 550-553; Statesman, 26
Cl. Ct., at 915-916. The Court of Federal Claims consolidated the
three cases and certified its decisions for interlocutory appeal.
A divided panel of the Federal Circuit reversed, holding that the
parties did not allocate to the Government, in an unmistakably clear
manner, the risk of a subsequent change in the regulatory capital
requirements. Winstar Corp. v. United States, 994 F. 2d 797, 811-
813 (1993). The full court, however, vacated this decision and agreed
to rehear the case en banc. After rebriefing and reargument, the en
banc court reversed the panel decision and affirmed the Court of
Federal Claims' rulings on liability. Winstar Corp. v. United States,
64 F. 3d 1531 (CA Fed. 1995) (en banc). The Federal Circuit found
that FSLIC had made express contracts with respondents, including a
promise that supervisory goodwill and capital credits could be counted
toward satisfaction of the regulatory capital requirements. Id., at
1540, 1542-1543. The court rejected the Government's
unmistakability argument, agreeing with the Court of Federal Claims
that that doctrine had no application in a suit for money damages. Id.,
at 1545-1548. Finally, the en banc majority found that FIRREA's
new capital requirements "single[d] out supervisory goodwill for
special treatment" and therefore could not be said to be a "public" and
"general act" within the meaning of the sovereign acts doctrine. Id., at
1548-1551. Judge Nies dissented, essentially repeating the arguments
in her prior opinion for the panel majority, id., at 1551-1552, and
Judge Lourie also dissented on the ground that FIRREA was a public
and general act, id., at 1552-1553. We granted certiorari, 516 U. S.
___ (1996), and now affirm.
We took this case to consider the extent to which special rules, not
generally applicable to private contracts, govern enforcement of the
governmental contracts at issue here. We decide whether the
Government may assert four special defenses to respondents' claims
for breach: the canon of contract construction that surrenders of
sovereign authority must appear in unmistakable terms, Bowen v.
Public Agencies Opposed to Social Security Entrapment, 477 U. S.
41, 52 (1986); the rule that an agent's authority to make such
surrenders must be delegated in express terms, Home Telephone &
Telegraph Co. v. City of Los Angeles, 211 U. S. 265 (1908); the
doctrine that a government may not, in any event, contract to
surrender certain reserved powers, Stone v. Mississippi, 101 U. S.
814 (1880); and, finally, the principle that a Government's sovereign
acts do not give rise to a claim for breach of contract, Horowitz v.
United States, 267 U. S. 458, 460 (1925).
The anterior question of whether there were contracts at all between
the Government and respondents dealing with regulatory treatment of
supervisory goodwill and capital credits, although briefed and argued
by the parties in this Court, is not strictly before us. See Yee v.
Escondido, 503 U. S. 519, 535 (1992) (noting that "we ordinarily do
not consider questions outside those presented in the petition for
certiorari"); Sup. Ct. Rule 14.1(a). And although we may review the
Court of Federal Claims' grant of summary judgment de novo,
Eastman Kodak Co. v. Image Technical Services, Inc., 504 U. S.
451, 465, n. 10 (1992), we are in no better position than the Federal
Circuit and the Court of Federal Claims to evaluate the documentary
records of the transactions at issue. Our resolution of the legal issues
raised by the petition for certiorari, however, does require some
consideration of the nature of the underlying transactions.
The Federal Circuit found that "[t]he three plaintiff thrifts negotiated
contracts with the bank regulatory agencies that allowed them to
include supervisory goodwill (and capital credits) as assets for
regulatory capital purposes and to amortize that supervisory goodwill
over extended periods of time." 64 F. 3d, at 1545. Although each of
these transactions was fundamentally similar, the relevant
circumstances and documents vary somewhat from case to case.
In September 1981, Glendale was approached about a possible merger
by the First Federal Savings and Loan Association of Broward
County, which then had liabilities exceeding the fair value of its assets
by over $734 million. At the time, Glendale's accountants estimated
that FSLIC would have needed approximately $1.8 billion to liquidate
Broward, only about $1 billion of which could be recouped through
the sale of Broward's assets. Glendale, on the other hand, was both
profitable and well capitalized, with a net worth of $277 million.12
After some preliminary negotiations with the regulators, Glendale
submitted a merger proposal to the Bank Board, which had to approve
all mergers involving savings and loan associations, see 12 U. S. C.
Section 1467a(e)(1)(A) and (B); 12 U. S. C. Section 1817(j)(1); that
proposal assumed the use of the purchase method of accounting to
record supervisory goodwill arising from the transaction, with an
amortization period of 40 years. The Bank Board ratified the merger,
or "Supervisory Action Agreement" (SAA), on November 19, 1981.
The SAA itself said nothing about supervisory goodwill, but did
contain the following integration clause:
"This Agreement . . . constitutes the entire agreement between the
parties thereto and supersedes all prior agreements and understandings
of the parties in connection herewith, excepting only the Agreement of
Merger and any resolutions or letters issued contemporaneously
herewith." App. 598-599.
The SAA thereby incorporated Bank Board Resolution No. 81-710,
by which the Board had ratified the SAA. That Resolution referred to
two additional documents: a letter to be furnished by Glendale's
independent accountant identifying and supporting the use of any
goodwill to be recorded on Glendale's books, as well as the resulting
amortization periods; and "a stipulation that any goodwill arising from
this transaction shall be determined and amortized in accordance with
[Bank Board] Memorandum R 31b." Id., at 607. Memorandum R
31b, finally, permitted Glendale to use the purchase method of
accounting and to recognize goodwill as an asset subject to
amortization. See id., at 571-574.
The Government does not seriously contest this evidence that the
parties understood that goodwill arising from these transactions would
be treated as satisfying regulatory requirements; it insists, however,
that these documents simply reflect statements of then-current federal
regulatory policy rather than contractual undertakings. Neither the
Court of Federal Claims nor the Federal Circuit so read the record,
however, and we agree with those courts that the Government's
interpretation of the relevant documents is fundamentally implausible.
The integration clause in Glendale's Supervisory Action Agreement
(SAA) with FSLIC, which is similar in all relevant respects to the
analogous provisions in the Winstar and Statesman contracts,
provides that the SAA supersedes "all prior agreements and
understandings . . . excepting only . . . any resolutions or letters
issued contemporaneously" by the Board, id., at 598-599; in other
words, the SAA characterizes the Board's resolutions and letters not
as statements of background rules, but as part of the "agreements and
understandings" between the parties.
To the extent that the integration clause leaves any ambiguity, the other
courts that construed the documents found that the realities of the
transaction favored reading those documents as contractual
commitments, not mere statements of policy, see Restatement
(Second) of Contracts Section 202(1) (1981) ("Words and other
conduct are interpreted in the light of all the circumstances, and if the
principal purpose of the parties is ascertainable it is given great
weight"), and we see no reason to disagree. As the Federal Circuit
noted, "[i]t is not disputed that if supervisory goodwill had not been
available for purposes of meeting regulatory capital requirements, the
merged thrift would have been subject to regulatory noncompliance
and penalties from the moment of its creation." 64 F. 3d, at 1542.
Indeed, the assumption of Broward's liabilities would have rendered
Glendale immediately insolvent by approximately $460 million, but
for Glendale's right to count goodwill as regulatory capital. Although
one can imagine cases in which the potential gain might induce a party
to assume a substantial risk that the gain might be wiped out by a
change in the law, it would have been irrational in this case for
Glendale to stake its very existence upon continuation of current
policies without seeking to embody those policies in some sort of
contractual commitment. This conclusion is obvious from both the
dollar amounts at stake and the regulators' proven propensity to make
changes in the relevant requirements. See Brief for United States 26
("[I]n light of the frequency with which federal capital requirements
had changed in the past . . . , it would have been unreasonable for
Glendale, FSLIC, or the Bank Board to expect or rely upon the fact
that those requirements would remain unchanged"); see also infra, at
68-69. Under the circumstances, we have no doubt that the parties
intended to settle regulatory treatment of these transactions as a
condition of their agreement. See, e.g., The Binghamton Bridge, 3
Wall. 51, 78 (1866) (refusing to construe charter in such a way that it
would have been "madness" for private party to enter into it).13 We
accordingly have no reason to question the Court of Appeals's
conclusion that "the government had an express contractual obligation
to permit Glendale to count the supervisory goodwill generated as a
result of its merger with Broward as a capital asset for regulatory
capital purposes." 64 F. 3d, at 1540.
In 1983, FSLIC solicited bids for the acquisition of Windom Federal
Savings and Loan Association, a Minnesota-based thrift in danger of
failing. At that time, the estimated cost to the Government of
liquidating Windom was approximately $12 million. A group of
private investors formed Winstar Corporation for the purpose of
acquiring Windom and submitted a merger plan to FSLIC; it called for
capital contributions of $2.8 million from Winstar and $5.6 million
from FSLIC, as well as for recognition of supervisory goodwill to be
amortized over a period of 35 years.
The Bank Board accepted the Winstar proposal and made an
Assistance Agreement that incorporated, by an integration clause much
like Glendale's, both the Board's resolution approving the merger and
a forbearance letter issued on the date of the agreement. See App.
112. The forbearance letter provided that "[f]or purposes of reporting
to the Board, the value of any intangible assets resulting from
accounting for the merger in accordance with the purchase method
may be amortized by [Winstar] over a period not to exceed 35 years
by the straight-line method." Id., at 123. Moreover, the Assistance
Agreement itself contained an "Accounting Principles" section with the
following provisions:
"Except as otherwise provided, any computations made for the
purposes of this Agreement shall be governed by generally accepted
accounting principles as applied on a going concern basis in the
savings and loan industry, except that where such principles conflict
with the terms of this Agreement, applicable regulations of the Bank
Board or the [FSLIC], or any resolution or action of the Bank Board
approving or adopted concurrently with this Agreement, then this
Agreement, such regulations, or such resolution or action shall
govern. . . . If there is a conflict between such regulations and the
Bank Board's resolution or action, the Bank Board's resolution or
action shall govern. For purposes of this section, the governing
regulations and the accounting principles shall be those in effect on the
Effective Date or as subsequently clarified, interpreted, or amended by
the Bank Board or the Financial Accounting Standards Board
("FASB"), respectively, or any successor organization to either." Id.,
at 108-109.
The Government emphasizes the last sentence of this clause, which
provides that the relevant accounting principles may be "subsequently
clarified . . . or amended," as barring any inference that the
Government assumed the risk of regulatory change. Its argument,
however, ignores the preceding sentence providing that the Bank
Board's resolutions and actions in connection with the merger must
prevail over contrary regulations. If anything, then, the accounting
principles clause tilts in favor of interpreting the contract to lock in the
then-current regulatory treatment of supervisory goodwill.
In any event, we do not doubt the soundness of the Federal Circuit's
finding that the overall "documentation in the Winstar transaction
establishes an express agreement allowing Winstar to proceed with the
merger plan approved by the Bank Board, including the recording of
supervisory goodwill as a capital asset for regulatory capital purposes
to be amortized over 35 years." 64 F. 3d, at 1544. As in the
Glendale transaction, the circumstances of the merger powerfully
support this conclusion: The tangible net worth of the acquired
institution was a negative $6.7 million, and the new Winstar thrift
would have been out of compliance with regulatory capital standards
from its very inception, without including goodwill in the relevant
calculations. We thus accept the Court of Appeals's conclusion that
"it was the intention of the parties to be bound by the accounting
treatment for goodwill arising in the merger." Ibid.
Statesman, another nonthrift entity, approached FSLIC in 1987 about
acquiring a subsidiary of First Federated Savings Bank, an insolvent
Florida thrift. FSLIC responded that if Statesman wanted government
assistance in the acquisition it would have to acquire all of First
Federated as well as three shaky thrifts in Iowa. Statesman and
FSLIC ultimately agreed on a complex plan for acquiring the four
thrifts; the agreement involved application of the purchase method of
accounting, a $21 million cash contribution from Statesman to be
accompanied by $60 million from FSLIC, and (unlike the Glendale
and Winstar plans) treatment of $26 million of FSLIC's contribution
as a permanent capital credit to Statesman's regulatory capital.
The Assistance Agreement between Statesman and FSLIC included an
"accounting principles" clause virtually identical to Winstar's, see
App. 402-403, as well as a specific provision for the capital credit:
"For the purposes of reports to the Bank Board . . . , $26 million of
the contribution [made by FSLIC] shall be credited to [Statesman's]
regulatory capital account and shall constitute regulatory capital (as
defined in Section 561.13 of the Insurance Regulations)." Id., at
362a.
As with Glendale and Winstar, the Agreement had an integration
clause incorporating contemporaneous resolutions and letters issued
by the Board. Id., at 407-408. The Board's Resolution explicitly
acknowledged both the capital credits and the creation of supervisory
goodwill to be amortized over 25 years, id., at 458-459, and the
Forbearance Letter likewise recognized the capital credit provided for
in the Agreement. Id., at 476. Finally, the parties executed a separate
Regulatory Capital Maintenance Agreement stating that, "[i]n
consideration of the mutual promises contained [t]herein," id., at 418,
Statesman would be obligated to maintain the regulatory capital of the
acquired thrifts "at the level . . . required by Section 563.13(b) of the
Insurance Regulations... or any successor regulation . . . ." The
agreement further provided, however, that "[f]or purposes of this
Agreement, any determination of [Statesman's] Required Regulatory
Capital . . . shall include . . . amounts permitted by the FSLIC in the
Assistance Agreement and in the forbearances issued in connection
with the transactions discussed herein." Id., at 418-419. Absent
those forbearances, Statesman's thrift would have remained insolvent
by almost $9 million despite the cash infusions provided by the parties
to the transaction.
For the same reasons set out above with respect to the Glendale and
Winstar transactions, we accept the Federal Circuit's conclusion that
"the government was contractually obligated to recognize the capital
credits and the supervisory goodwill generated by the merger as part
of the Statesman's regulatory capital requirement and to permit such
goodwill to be amortized on a straight line basis over 25 years." 64 F.
3d, at 1543. Indeed, the Government's position is even weaker in
Statesman's case because the capital credits portion of the agreement
contains an express commitment to include those credits in the
calculation of regulatory capital. The Government asserts that the
reference to Section 563.13 of FSLIC regulations, which at the time
defined regulatory capital for thrift institutions, indicates that the
Government's obligations could change along with the relevant
regulations. But, just as in Winstar's case, the Government would
have us overlook the specific incorporation of the then-current
regulations as part of the agreement.14 The Government also cites a
provision requiring Statesman to "comply in all material respects with
all applicable statutes, regulations, orders of, and restrictions imposed
by the United States or . . . by any agency of [the United States],"
App. 407, but this simply meant that Statesman was required to
observe FIRREA's new capital requirements once they were
promulgated. The clause was hardly necessary to oblige Statesman to
obey the law, and nothing in it barred Statesman from asserting that
passage of that law required the Government to take action itself or be
in breach of its contract.
It is important to be clear about what these contracts did and did not
require of the Government. Nothing in the documentation or the
circumstances of these transactions purported to bar the Government
from changing the way in which it regulated the thrift industry.
Rather, what the Federal Circuit said of the Glendale transaction is
true of the Winstar and Statesman deals as well: "the Bank Board and
the FSLIC were contractually bound to recognize the supervisory
goodwill and the amortization periods reflected" in the agreements
between the parties. 64 F. 3d, at 1541-1542. We read this promise
as the law of contracts has always treated promises to provide
something beyond the promisor's absolute control, that is, as a
promise to insure the promisee against loss arising from the promised
condition's nonoccurrence.15 Holmes's example is famous:
"[i]n the case of a binding promise that it shall rain to-morrow, the
immediate legal effect of what the promisor does is, that he takes the
risk of the event, within certain defined limits, as between himself and
the promisee." Holmes, The Common Law (1881), in 3 The
Collected Works of Justice Holmes 268 (S. Novick ed. 1995).16
Contracts like this are especially appropriate in the world of regulated
industries, where the risk that legal change will prevent the bargained-
for performance is always lurking in the shadows. The drafters of the
Restatement attested to this when they explained that, "[w]ith the trend
toward greater governmental regulation... parties are increasingly
aware of such risks, and a party may undertake a duty that is not
discharged by such supervening governmental actions . . . ."
Restatement (Second) of Contracts Section 264, Comment a. "Such
an agreement," according to the Restatement, "is usually interpreted as
one to pay damages if performance is prevented rather than one to
render a performance in violation of law." Ibid.17
When the law as to capital requirements changed in the present
instance, the Government was unable to perform its promise and,
therefore, became liable for breach. We accept the Federal Circuit's
conclusion that the Government breached these contracts when,
pursuant to the new regulatory capital requirements imposed by
FIRREA, 12 U. S. C. Section 1464(t), the federal regulatory agencies
limited the use of supervisory goodwill and capital credits in
calculating respondents' net worth. 64 F. 3d, at 1545. In the case of
Winstar and Statesman, the Government exacerbated its breach when
it seized and liquidated respondents' thrifts for regulatory
noncompliance. Ibid.
In evaluating the relevant documents and circumstances, we have, of
course, followed the Federal Circuit in applying ordinary principles of
contract construction and breach that would be applicable to any
contract action between private parties. The Government's case,
however, is that the Federal Circuit's decision to apply ordinary
principles was error for a variety of reasons, each of which we
consider, and reject, in the sections ahead.
The Government argues for reversal, first, on the principle that
"contracts that limit the government's future exercises of regulatory
authority are strongly disfavored; such contracts will be recognized
only rarely, and then only when the limitation on future regulatory
authority is expressed in unmistakable terms." Brief for United States
16. Hence, the Government says, the agreements between the Bank
Board, FSLIC, and respondents should not be construed to waive
Congress's authority to enact a subsequent bar to using supervisory
goodwill and capital credits to meet regulatory capital requirements.
The argument mistakes the scope of the unmistakability doctrine. The
thrifts do not claim that the Bank Board and FSLIC purported to bind
Congress to ossify the law in conformity to the contracts; they seek no
injunction against application of FIRREA's new capital requirements
to them and no exemption from FIRREA's terms. They simply claim
that the Government assumed the risk that subsequent changes in the
law might prevent it from performing, and agreed to pay damages in
the event that such failure to perform caused financial injury. The
question, then, is not whether Congress could be constrained but
whether the doctrine of unmistakability is applicable to any contract
claim against the Government for breach occasioned by a subsequent
act of Congress. The answer to this question is no.
The unmistakability doctrine invoked by the Government was stated in
Bowen v. Public Agencies Opposed to Social Security Entrapment:
"`[S]overeign power . . . governs all contracts subject to the
sovereign's jurisdiction, and will remain intact unless surrendered in
unmistakable terms.'" 477 U. S., at 52 (quoting Merrion v. Jicarilla
Apache Tribe, 455 U. S. 130, 148 (1982)). This doctrine marks the
point of intersection between two fundamental constitutional concepts,
the one traceable to the theory of parliamentary sovereignty made
familiar by Blackstone, the other to the theory that legislative power
may be limited, which became familiar to Americans through their
experience under the colonial charters, see G. Wood, The Creation of
the American Republic 1776-1787, pp. 268-271 (1969).
In his Commentaries, Blackstone stated the centuries-old concept that
one legislature may not bind the legislative authority of its successors:
"Acts of parliament derogatory from the power of subsequent
parliaments bind not. . . . Because the legislature, being in truth the
sovereign power, is always of equal, always of absolute authority: it
acknowledges no superior upon earth, which the prior legislature must
have been, if it's [sic] ordinances could bind the present parliament."
1 W. Blackstone, Commentaries on the Laws of England 90
(1765).18
In England, of course, Parliament was historically supreme in the
sense that no "higher law" limited the scope of legislative action or
provided mechanisms for placing legally enforceable limits upon it in
specific instances; the power of American legislative bodies, by
contrast, is subject to the overriding dictates of the Constitution and
the obligations that it authorizes. See Eule, Temporal Limits on the
Legislative Mandate: Entrenchment and Retroactivity, 1987 Am. Bar
Found. Research J. 379, 392-393 (observing that the English
rationale for precluding a legislature from binding its successors does
not apply in America). Hence, although we have recognized that "a
general law . . . may be repealed, amended or disregarded by the
legislature which enacted it," and "is not binding upon any subsequent
legislature," Manigault v. Springs, 199 U. S. 473, 487 (1905),19 on
this side of the Atlantic the principle has always lived in some tension
with the constitutionally created potential for a legislature, under
certain circumstances, to place effective limits on its successors, or to
authorize executive action resulting in such a limitation.
The development of this latter, American doctrine in federal litigation
began in cases applying limits on state sovereignty imposed by the
National Constitution. Thus Chief Justice Marshall's exposition in
Fletcher v. Peck, 6 Cranch 87 (1810), where the Court held that the
Contract Clause, U. S. Const., Art. I, Section 10, cl. 1, barred the
State of Georgia's effort to rescind land grants made by a prior state
legislature. Marshall acknowledged "that one legislature is competent
to repeal any act which a former legislature was competent to pass;
and that one legislature cannot abridge the powers of a succeeding
legislature." Id., at 135. "The correctness of this principle, so far as
respects general legislation," he said, "can never be controverted."
Ibid. Marshall went on to qualify the principle, however, noting that
"if an act be done under a law, a succeeding legislature cannot undo it.
The past cannot be recalled by the most absolute power." Ibid. For
Marshall, this was true for the two distinct reasons that the intrusion
on vested rights by the Georgia legislature's act of repeal might well
have gone beyond the limits of "the legislative power," and that
Georgia's legislative sovereignty was limited by the Federal
Constitution's bar against laws impairing the obligation of contracts.
Id., at 135-136.
The impetus for the modern unmistakability doctrine was thus Chief
Justice Marshall's application of the Contract Clause to public
contracts. Although that Clause made it possible for state legislatures
to bind their successors by entering into contracts, it soon became
apparent that such contracts could become a threat to the sovereign
responsibilities of state governments. Later decisions were
accordingly less willing to recognize contractual restraints upon
legislative freedom of action, and two distinct limitations developed to
protect state regulatory powers. One came to be known as the
"reserved powers" doctrine, which held that certain substantive
powers of sovereignty could not be contracted away. See West River
Bridge Co. v. Dix, 6 How. 507 (1848) (holding that a State's
contracts do not surrender its eminent domain power).20 The other,
which surfaced somewhat earlier in Providence Bank v. Billings, 4
Pet. 514 (1830), and Charles River Bridge v. Warren Bridge, 11 Pet.
420 (1837), was a canon of construction disfavoring implied
governmental obligations in public contracts. Under this rule that
"[a]ll public grants are strictly construed," The Delaware Railroad
Tax, 18 Wall. 206, 225 (1874), we have insisted that "[n]othing can
be taken against the state by presumption or inference," ibid., and that
"neither the right of taxation, nor any other power of sovereignty, will
be held . . . to have been surrendered, unless such surrender has been
expressed in terms too plain to be mistaken." Jefferson Branch Bank
v. Skelly, 1 Black 436, 446 (1862).
The posture of the Government in these early unmistakability cases is
important. In each, a state or local government entity had made a
contract granting a private party some concession (such as a tax
exemption or a monopoly), and a subsequent governmental action had
abrogated the contractual commitment. In each case, the private party
was suing to invalidate the abrogating legislation under the Contract
Clause. A requirement that the government's obligation unmistakably
appear thus served the dual purposes of limiting contractual incursions
on a State's sovereign powers and of avoiding difficult constitutional
questions about the extent of State authority to limit the subsequent
exercise of legislative power. Cf. Edward J. DeBartolo Corp. v.
Florida Gulf Coast Building & Constr. Trades Council, 485 U. S.
568, 575 (1988) ("[W]here an otherwise acceptable construction of a
statute would raise serious constitutional problems, the Court will
construe the statute to avoid such problems unless such construction is
plainly contrary to the intent of Congress"); Ashwander v. TVA, 297
U. S. 288, 348 (1936) (Brandeis, J., concurring) (same).
The same function of constitutional avoidance has marked the
expansion of the unmistakability doctrine from its Contract Clause
origins dealing with state grants and contracts to those of other
governmental sovereigns, including the United States. See Merrion v.
Jicarilla Apache Tribe, 455 U. S., at 148 (deriving the unmistakability
principle from St. Louis v. United Railways Co., 210 U. S. 266
(1908), a Contract Clause suit against a state government).21
Although the Contract Clause has no application to acts of the United
States, Pension Benefit Guaranty Corp. v. R. A. Gray & Co., 467 U.
S. 717, 732, n. 9 (1984), it is clear that the National Government has
some capacity to make agreements binding future Congresses by
creating vested rights, see, e.g., Perry v. United states, 294 U. S.
330 (1935); Lynch v. United States, 292 U. S. 571 (1934). The
extent of that capacity, to be sure, remains somewhat obscure.
Compare, e.g., United States Trust Co. of N.Y. v. New Jersey, 431
U. S. 1, 26 (1977) (heightened Contract Clause scrutiny when States
abrogate their own contractual obligations), with Pension Benefit
Guaranty Corp., supra, at 733 (contrasting less exacting due process
standards governing federal economic legislation affecting private
contracts). But the want of more developed law on limitations
independent of the Contract Clause is in part the result of applying the
unmistakability canon of construction to avoid this doctrinal thicket, as
we have done in several cases involving alleged surrenders of
sovereign prerogatives by the National Government and Indian tribes.
First, we applied the doctrine to protect a tribal sovereign in Merrion
v. Jicarilla Apache Tribe, 455 U. S. 130 (1982), which held that long-
term oil and gas leases to private parties from an Indian tribe,
providing for specific royalties to be paid to the tribe, did not limit the
tribe's sovereign prerogative to tax the proceeds from the lessees'
drilling activities. Id., at 148. Because the lease made no reference to
the tribe's taxing power, we held simply that a waiver of that power
could not be "inferred . . . from silence," ibid., since the taxing power
of any government remains "unless it is has been specifically
surrendered in terms which admit of no other reasonable
interpretation." Ibid. (internal quotation marks and citation omitted).
In Bowen v. Public Agencies Opposed to Social Security Entrapment,
477 U. S. 41 (1986), this Court confronted a state claim that Section
103 of the Social Security Amendments Act of 1983, 97 Stat. 71, 42
U. S. C. Section 418(g) (1982 ed., Supp. II), was unenforceable to
the extent it was inconsistent with the terms of a prior agreement with
the National Government. Under the law before 1983, a State could
agree with the Secretary of Health and Human Services to cover the
State's employees under the Social Security scheme subject to a right
to withdraw them from coverage later. When the 1983 Act eliminated
the right of withdrawal, the State of California and related plaintiffs
sought to enjoin application of the new law to them, or to obtain just
compensation for loss of the withdrawal right (a remedy which the
District Court interpreted as tantamount to the injunction, since it
would mandate return of all otherwise required contributions, see 477
U. S., at 51). Although we were able to resolve the case by reading
the terms of a state-federal coverage agreement to reserve the
Government's right to modify its terms by subsequent legislation, in
the alternative we rested the decision on the more general principle
that, absent an "unmistakable" provision to the contrary, "contractual
arrangements, including those to which a sovereign itself is a party,
`remain subject to subsequent legislation' by the sovereign." Id., at 52
(quoting Merrion, supra, at 147). We thus rejected the proposal "to
find that a `sovereign forever waives the right to exercise one of its
sovereign powers unless it expressly reserves the right to exercise that
power in' the contract," Bowen, supra, at 52 (quoting Merrion, supra,
at 148), and held instead that unmistakability was needed for waiver,
not reservation.
Most recently, in United States v. Cherokee Nation of Oklahoma, 480
U. S. 700 (1987), we refused to infer a waiver of federal sovereign
power from silence. There, an Indian tribe with property rights in a
river bed derived from a government treaty sued for just compensation
for damage to its interests caused by the Government's navigational
improvements to the Arkansas river. The claim for compensation
presupposed, and was understood to presuppose, that the
Government had conveyed to the tribe its easement to control
navigation; absent that conveyance, the tribe's property included no
right to be free from the Government's river bed improvements. Id.,
at 704. We found, however, that the treaty said nothing about
conveying the Government's navigational easement, see id., at 706,
which we saw as an aspect of sovereignty. This, we said, could be
"`surrendered [only] in unmistakable terms,'" id., at 707 (quoting
Bowen, supra, at 52), if indeed it could be waived at all.
Merrion, Bowen, and Cherokee Nation thus announce no new rule
distinct from the canon of construction adopted in Providence Bank
and Charles River Bridge; their collective holding is that a contract
with a sovereign government will not be read to include an unstated
term exempting the other contracting party from the application of a
subsequent sovereign act (including an act of Congress), nor will an
ambiguous term of a grant or contract be construed as a conveyance or
surrender of sovereign power. The cases extending back into the
19th-century thus stand for a rule that applies when the Government is
subject either to a claim that its contract has surrendered a sovereign
power22 (e.g., to tax or control navigation), or to a claim that cannot
be recognized without creating an exemption from the exercise of such
a power (e.g., the equivalent of exemption from social security
obligations). The application of the doctrine thus turns on whether
enforcement of the contractual obligation alleged would block the
exercise of a sovereign power of the Government.
Since the criterion looks to the effect of a contract's enforcement, the
particular remedy sought is not dispositive and the doctrine is not
rendered inapplicable by a request for damages, as distinct from
specific performance. The respondents in Cherokee Nation sought
nothing beyond damages, but the case still turned on the
unmistakability doctrine because there could be no claim to harm
unless the right to be free of the sovereign power to control navigation
had been conveyed away by the Government.23 So, too, in Bowen:
the sole relief sought was dollars and cents, but the award of damages
as requested would have been the equivalent of exemption from the
terms of the subsequent statute.
The application of the doctrine will therefore differ according to the
different kinds of obligations the Government may assume and the
consequences of enforcing them. At one end of the wide spectrum are
claims for enforcement of contractual obligations that could not be
recognized without effectively limiting sovereign authority, such as a
claim for rebate under an agreement for a tax exemption. Granting a
rebate, like enjoining enforcement, would simply block the exercise of
the taxing power, cf. Bowen, 477 U. S., at 51, and the
unmistakability doctrine would have to be satisfied.24 At the other
end are contracts, say, to buy food for the army; no sovereign power
is limited by the Government's promise to purchase and a claim for
damages implies no such limitation. That is why no one would
seriously contend that enforcement of humdrum supply contracts
might be subject to the unmistakability doctrine. Between these
extremes lies an enormous variety of contracts including those under
which performance will require exercise (or not) of a power peculiar
to the Government. So long as such a contract is reasonably
construed to include a risk-shifting component that may be enforced
without effectively barring the exercise of that power, the enforcement
of the risk allocation raises nothing for the unmistakability doctrine to
guard against, and there is no reason to apply it.
The Government argues that enforcement of the contracts in this case
would implicate the unmistakability principle, with the consequence
that Merrion, Bowen, and Cherokee Nation are good authorities for
rejecting respondents' claims. The Government's position is
mistaken, however, for the complementary reasons that the contracts
have not been construed as binding the Government's exercise of
authority to modify banking regulation or of any other sovereign
power, and there has been no demonstration that awarding damages
for breach would be tantamount to any such limitation.
As construed by each of the courts that considered these contracts
before they reached us, the agreements do not purport to bind the
Congress from enacting regulatory measures, and respondents do not
ask the courts to infer from silence any such limit on sovereign power
as would violate the holdings of Merrion and Cherokee Nation. The
contracts have been read as solely risk-shifting agreements and
respondents seek nothing more than the benefit of promises by the
Government to insure them against any losses arising from future
regulatory change. They seek no injunction against application of the
law to them, as the plaintiffs did in Bowen and Merrion, cf.
Reichelderfer v. Quinn, 287 U. S. 315 (1932), and they acknowledge
that the Bank Board and FSLIC could not bind Congress (and
possibly could not even bind their future selves) not to change
regulatory policy.
Nor do the damages respondents seek amount to exemption from the
new law, in the manner of the compensation sought in Bowen, see
supra, at 51. Once general jurisdiction to make an award against the
Government is conceded, a requirement to pay money supposes no
surrender of sovereign power by a sovereign with the power to
contract. See, e.g., Amino Bros. Co. v. United States, 178 Ct. Cl.
515, 525, 372 F. 2d 485, 491 ("The Government cannot make a
binding contract that it will not exercise a sovereign power, but it can
agree in a contract that if it does so, it will pay the other contracting
party the amount by which its costs are increased by the
Government's sovereign act"), cert. denied, 389 U. S. 846 (1967).25
Even if the respondents were asking that the Government be required
to make up any capital deficiency arising from the exclusion of
goodwill and capital credits from the relevant calculations, such relief
would hardly amount to an exemption from the capital requirements of
FIRREA; after all, Glendale (the only respondent thrift still in
operation) would still be required to maintain adequate tangible capital
reserves under FIRREA, and the purpose of the statute, the protection
of the insurance fund, would be served. Nor would such a damages
award deprive the Government of money it would otherwise be
entitled to receive (as a tax rebate would), since the capital
requirements of FIRREA govern only the allocation of resources to a
thrift and require no payments to the Government at all.26
We recognize, of course, that while agreements to insure private
parties against the costs of subsequent regulatory change do not
directly impede the exercise of sovereign power, they may indirectly
deter needed governmental regulation by raising its costs. But all
regulations have their costs, and Congress itself expressed a
willingness to bear the costs at issue here when it authorized FSLIC to
"guarantee [acquiring thrifts] against loss" that might occur as a result
of a supervisory merger. 12 U. S. C. Section 1729(f)(2) (1988 ed.)
(repealed 1989). Just as we have long recognized that the Constitution
"`bar[s] Government from forcing some people alone to bear public
burdens which, in all fairness and justice, should be borne by the
public as a whole,'" Dolan v. City of Tigard, 512 U. S. ___, ___
(slip op., at 9) (quoting Armstrong v. United States, 364 U. S. 40, 49
(1960)), so we must reject the suggestion that the Government may
simply shift costs of legislation onto its contractual partners who are
adversely affected by the change in the law, when the Government has
assumed the risk of such change.
The Government's position would not only thus represent a
conceptual expansion of the unmistakability doctrine beyond its
historical and practical warrant, but would place the doctrine at odds
with the Government's own long-run interest as a reliable contracting
partner in the myriad workaday transaction of its agencies. Consider
the procurement contracts that can be affected by congressional or
executive scale-backs in federal regulatory or welfare activity; or
contracts to substitute private service-providers for the Government,
which could be affected by a change in the official philosophy on
privatization; or all the contracts to dispose of federal property,
surplus or otherwise. If these contracts are made in reliance on the
law of contract and without specific provision for default
mechanisms,27 should all the private contractors be denied a remedy
in damages unless they satisfy the unmistakability doctrine? The
answer is obviously no because neither constitutional avoidance nor
any apparent need to protect the Government from the consequences
of standard operations could conceivably justify applying the doctrine.
Injecting the opportunity for unmistakability litigation into every
common contract action would, however, produce the untoward result
of compromising the Government's practical capacity to make
contracts, which we have held to be "of the essence of sovereignty"
itself. United States v. Bekins, 304 U. S. 27, 51-52 (1938).28
From a practical standpoint, it would make an inroad on this power,
by expanding the Government's opportunities for contractual
abrogation, with the certain result of undermining the Government's
credibility at the bargaining table and increasing the cost of its
engagements. As Justice Brandeis recognized, "[p]unctilious
fulfillment of contractual obligations is essential to the maintenance of
the credit of public as well as private debtors." Lynch v. United
States, 292 U. S., at 580.29
The dissent's only answer to our concern is to recognize that
"Congress may not simply abrogate a statutory provision obligating
performance without breaching the contract and rendering itself liable
for damages." Post, at 6 (citing Lynch, supra, at 580). Yet the only
grounds that statement suggests for distinguishing Lynch from the
present case is that there the contractual obligation was embodied in a
statute. Putting aside the question why this distinction should make
any difference, we note that the dissent seemingly does not deny that
its view would apply the unmistakability doctrine to the vast majority
of governmental contracts, which would be subject to abrogation
arguments based on subsequent sovereign acts. Indeed, the dissent
goes so far as to argue that our conclusion that damages are available
for breach even where the parties did not specify a remedy in the
contract depends upon "reading of additional terms into the contract."
Post, at 7. That, of course, is not the law; damages are always the
default remedy for breach of contract.30 And we suspect that most
government contractors would be quite surprised by the dissent's
conclusion that, where they have failed to require an express provision
that damages will be available for breach, that remedy must be
"implied in law" and therefore unavailable under the Tucker Act, post,
at 7-8.
Nor can the dissenting view be confined to those contracts that are
"regulatory" in nature. Such a distinction would raise enormous
analytical difficulties; one could ask in this case whether the
Government as contractor was regulating or insuring. The dissent
understandably does not advocate such a distinction, but its failure to
advance any limiting principle at all would effectively compromise the
Government's capacity as a reliable, straightforward contractor
whenever the subject matter of a contract might be subject to
subsequent regulation, which is most if not all of the time.31 Since
the facts of the present case demonstrate that Government may wish to
further its regulatory goals through contract, we are unwilling to adopt
any rule of construction that would weaken the Government's capacity
to do business by converting every contract it makes into an arena for
unmistakability litigation.
In any event, we think the dissent goes fundamentally wrong when it
concludes that "the issue of remedy for... breach" can arise only "[i]f
the sovereign did surrender its power unequivocally." Post, at 6.
This view ignores the other, less remarkable possibility actually found
by both courts that construed these contracts: that the Government
agreed to do something that did not implicate its sovereign powers at
all, that is, to indemnify its contracting partners against financial
losses arising from regulatory change. We accordingly hold that the
Federal Circuit correctly refused to apply the unmistakability doctrine
here. See 64 F. 3d, at 1548. There being no need for an
unmistakably clear "second promise" not to change the capital
requirements, it is sufficient that the Government undertook an
obligation that it subsequently found itself unable to perform. This
conclusion does not, of course, foreclose the assertion of a defense
that the contracts were ultra vires or that the Government's obligation
should be discharged under the common-law doctrine of
impossibility, see infra, at 49-52, 52-72, but nothing in the nature of
the contracts themselves raises a bar to respondents' claims for
breach.32
The answer to the Government's unmistakability argument also meets
its two related contentions on the score of ultra vires: that the Bank
Board and FSLIC had no authority to bargain away Congress's power
to change the law in the future, and that we should in any event find
no such authority conferred without an express delegation to that
effect. The first of these positions rests on the reserved powers
doctrine, developed in the course of litigating claims that States had
violated the Contract Clause. See supra, at 34. It holds that a state
government may not contract away "an essential attribute of its
sovereignty," United States Trust, 431 U. S., at 23, with the classic
example of its limitation on the scope of the Contract Clause being
found in Stone v. Mississippi, 101 U. S. 814 (1880). There a
corporation bargained for and received a state legislative charter to
conduct lotteries, only to have them outlawed by statute a year later.
This Court rejected the argument that the charter immunized the
corporation from the operation of the statute, holding that "the
legislature cannot bargain away the police power of a State." Id., at
817.33
The Government says that "[t]he logic of the doctrine... applies
equally to contracts alleged to have been made by the federal
government." Brief for United States 38. This may be so but is also
beside the point, for the reason that the Government's ability to set
capital requirements is not limited by the Bank Board's and FSLIC's
promises to make good any losses arising from subsequent regulatory
changes. See supra, at 41-43. The answer to the Government's
contention that the State cannot barter away certain elements of its
sovereign power is that a contract to adjust the risk of subsequent
legislative change does not strip the Government of its legislative
sovereignty.34
The same response answers the Government's demand for express
delegation of any purported authority to fetter the exercise of
sovereign power. It is true, of course, that in Home Telephone &
Telegraph Co. v. City of Los Angeles, 211 U. S., at 273, we said that
"[t]he surrender, by contract, of a power of government, though in
certain well-defined cases it may be made by legislative authority, is a
very grave act, and the surrender itself, as well as the authority to
make it, must be closely scrutinized." Hence, where "a contract has
the effect of extinguishing pro tanto an undoubted power of
government," we have insisted that "both [the contract's] existence
and the authority to make it must clearly and unmistakably appear, and
all doubts must be resolved in favor of the continuance of the power."
Ibid. But Home Telephone & Telegraph simply has no application to
the present case, because there were no contracts to surrender the
Government's sovereign power to regulate.35
There is no question, conversely, that the Bank Board and FSLIC had
ample statutory authority to do what the Court of Federal Claims and
the Federal Circuit found they did do, that is, promise to permit
respondents to count supervisory goodwill and capital credits toward
regulatory capital and to pay respondents' damages if that performance
became impossible. The organic statute creating FSLIC as an arm of
the Bank Board, 12 U. S. C. Section 1725(c) (1988 ed.) (repealed
1989), generally empowered it "[t]o make contracts,"36 and Section
1729(f)(2), enacted in 1978, delegated more specific powers in the
context of supervisory mergers:
"Whenever an insured institution is in default or, in the judgment of
the Corporation, is in danger of default, the Corporation may, in order
to facilitate a merger or consolidation of such insured institution with
another insured institution . . . guarantee such other insured institution
against loss by reason of its merging or consolidating with or
assuming the liabilities and purchasing the assets of such insured
institution in or in danger of default." 12 U. S. C. Section 1729(f)(2)
(1976 ed. Supp. V) (repealed 1989).
Nor is there any reason to suppose that the breadth of this authority
was not meant to extend to contracts governing treatment of regulatory
capital. Congress specifically recognized FSLIC's authority to permit
thrifts to count goodwill toward capital requirements when it modified
the National Housing Act in 1987:
"No provision of this section shall affect the authority of the [FSLIC]
to authorize insured institutions to utilize subordinated debt and
goodwill in meeting reserve and other regulatory requirements." 12
U. S. C. Section 1730h(d) (1988 ed.) (repealed 1989).
See also S. Rep. No. 100-19, p. 55 (1987) ("It is expected that the
[Bank Board] will retain its own authority to determine . . . the
components and level of capital to be required of FSLIC-insured
institutions"); NLRB v. Bell Aerospace Co., 416 U. S. 267, 275
(1974) ("[S]ubsequent legislation declaring the intent of an earlier
statute is entitled to significant weight"). There is no serious question
that FSLIC (and the Bank Board acting through it) was authorized to
make the contracts in issue.
The Government's final line of defense is the sovereign acts doctrine,
to the effect that "`[w]hatever acts the government may do, be they
legislative or executive, so long as they be public and general, cannot
be deemed specially to alter, modify, obstruct or violate the particular
contracts into which it enters with private persons.'" Horowitz v.
United States, 267 U. S., at 461 (quoting Jones v. United States, 1
Ct. Cl. 383, 384 (1865)). Because FIRREA's alteration of the
regulatory capital requirements was a "public and general act," the
Government says, that act could not amount to a breach of the
Government's contract with respondents.
The Government's position cannot prevail, however, for two
independent reasons. The facts of this case do not warrant application
of the doctrine, and even if that were otherwise the doctrine would not
suffice to excuse liability under this governmental contract allocating
risks of regulatory change in a highly regulated industry.
In Horowitz, the plaintiff sued to recover damages for breach of a
contract to purchase silk from the Ordnance Department. The
agreement included a promise by the Department to ship the silk
within a certain time, although the manner of shipment does not
appear to have been a subject of the contract. Shipment was delayed
because the United States Railroad Administration placed an embargo
on shipments of silk by freight, and by the time the silk reached
Horowitz the price had fallen, rendering the deal unprofitable. This
Court barred any damages award for the delay, noting that "[i]t has
long been held by the Court of Claims that the United States when
sued as a contractor cannot be held liable for an obstruction to the
performance of the particular contract resulting from its public and
general acts as a sovereign." 267 U. S., at 461. This statement was
not, however, meant to be read as broadly as the Government urges,
and the key to its proper scope is found in that portion of our opinion
explaining that the essential point was to put the Government in the
same position that it would have enjoyed as a private contractor:
"`The two characters which the government possesses as a contractor
and as a sovereign cannot be thus fused; nor can the United States
while sued in the one character be made liable in damages for their acts
done in the other. Whatever acts the government may do, be they
legislative or executive, so long as they be public and general, cannot
be deemed specially to alter, modify, obstruct or violate the particular
contracts into which it enters with private persons. . . . In this court
the United States appear simply as contractors; and they are to be held
liable only within the same limits that any other defendant would be in
any other court. Though their sovereign acts performed for the
general good may work injury to some private contractors, such
parties gain nothing by having the United States as their defendants.'"
Ibid. (quoting Jones v. United States, supra, at 384).
The early Court of Claims cases upon which Horowitz relied
anticipated the Court's emphasis on the Government's dual and
distinguishable capacities and on the need to treat the government-as-
contractor the same as a private party. In Deming v. United States, 1
Ct. Cl. 190 (1865), the Court of Claims rejected a suit by a supplier of
army rations whose costs increased as a result of Congress's passage
of the Legal Tender Act. The Deming court thought it "grave error" to
suppose that "general enactments of Congress are to be construed as
evasions of [the plaintiff's] particular contract." Id., at 191. "The
United States as a contractor are not responsible for the United States
as a lawgiver," the court said. "In this court the United States can be
held to no greater liability than other contractors in other courts." Ibid.
Similarly, Jones v. United States, supra refused a suit by surveyors
employed by the Commissioner of Indian Affairs, whose performance
had been hindered by the United States's withdrawal of troops from
Indian country. "The United States as a contractor," the Claims Court
concluded, "cannot be held liable directly or indirectly for the public
acts of the United States as a sovereign." Id., at 385.
The Government argues that "[t]he relevant question [under these
cases] is whether the impact [of governmental action] . . . is caused by
a law enacted to govern regulatory policy and to advance the general
welfare." Brief for United States 45. This understanding assumes that
the dual characters of Government as contractor and legislator are
never "fused" (within the meaning of Horowitz) so long as the object
of the statute is regulatory and meant to accomplish some public
good. That is, on the Government's reading, a regulatory object is
proof against treating the legislature as having acted to avoid the
Government's contractual obligations, in which event the sovereign
acts defense would not be applicable. But the Government's position
is open to serious objection.
As an initial matter, we have already expressed our doubt that a
workable line can be drawn between the Government's "regulatory"
and "nonregulatory" capacities. In the present case, the Government
chose to regulate capital reserves to protect FSLIC's insurance fund,
much as any insurer might impose restrictions on an insured as a
condition of the policy. The regulation thus protected the Government
in its capacity analogous to a private insurer, the same capacity in
which it entered into supervisory merger agreements to convert some
of its financial insurance obligations into responsibilities of private
entrepreneurs. In this respect, the supervisory mergers bear some
analogy to private contracts for reinsurance.37 On the other hand,
there is no question that thrift regulation is, in fact, regulation, and that
both the supervisory mergers of the 1980's and the subsequent
passage of FIRREA were meant to advance a broader public interest.
The inescapable conclusion from all of this is that the Government's
"regulatory" and "nonregulatory" capacities were fused in the
instances under consideration, and we suspect that such fusion will be
so common in the modern regulatory state as to leave a criterion of
"regulation" without much use in defining the scope of the sovereign
acts doctrine.38
An even more serious objection is that allowing the Government to
avoid contractual liability merely by passing any "regulatory statute,"
would flaunt the general principle that, "[w]hen the United States
enters into contract relations, its rights and duties therein are governed
generally by the law applicable to contracts between private
individuals." Lynch v. United States, 292 U. S., at 579.39 Careful
attention to the cases shows that the sovereign acts doctrine was meant
to serve this principle, not undermine it. In Horowitz, for example, if
the defendant had been a private shipper, it would have been entitled
to assert the common-law defense of impossibility of performance
against Horowitz's claim for breach. Although that defense is
traditionally unavailable where the barrier to performance arises from
the act of the party seeking discharge, see Restatement (Second) of
Contracts Section 261; 2 E. Farnsworth, Farnsworth on Contracts
Section 9.6, p. 551 (1990); cf. W. R. Grace & Co. v. Rubber
Workers, 461 U. S. 757, 767-768, n. 10 (1983), Horowitz held that
the "public and general" acts of the sovereign are not attributable to the
Government as contractor so as to bar the Government's right to
discharge. The sovereign acts doctrine thus balances the
Government's need for freedom to legislate with its obligation to
honor its contracts by asking whether the sovereign act is properly
attributable to the Government as contractor. If the answer is no, the
Government's defense to liability depends on the answer to the further
question, whether that act would otherwise release the Government
from liability under ordinary principles of contract law.40 Neither
question can be answered in the Government's favor here.
If the Government is to be treated like other contractors, some line has
to be drawn in situations like the one before us between regulatory
legislation that is relatively free of government self-interest and
therefore cognizable for the purpose of a legal impossibility defense
and, on the other hand, statutes tainted by a governmental object of
self-relief. Such an object is not necessarily inconsistent with a public
purpose, of course, and when we speak of governmental "self-
interest," we simply mean to identify instances in which the
Government seeks to shift the costs of meeting its legitimate public
responsibilities to private parties. Cf. Armstrong v. United States,
364 U. S., at 49 (The Government may not "forc[e] some people
alone to bear public burdens which . . . should be borne by the public
as a whole"). Hence, while the Government might legitimately
conclude that a given contractual commitment was no longer in the
public interest, a government seeking relief from such commitments
through legislation would obviously not be in a position comparable to
that of the private contractor who willy-nilly was barred by law from
performance. There would be, then, good reason in such
circumstance to find the regulatory and contractual characters of the
Government fused together, in Horowitz's terms, so that the
Government should not have the benefit of the defense.41
Horowitz's criterion of "public and general act" thus reflects the
traditional "rule of law" assumption that generality in the terms by
which the use of power is authorized will tend to guard against its
misuse to burden or benefit the few unjustifiably.42 See, e.g.,
Hurtado v. California, 110 U. S. 516, 535-536 (1884) ("Law . . .
must be not a special rule for a particular person or a particular case,
but . . . `[t]he general law . . .' so `that every citizen shall hold his
life, liberty, property and immunities under the protection of the
general rules which govern society'") (citation omitted).43 Hence,
governmental action will not be held against the Government for
purposes of the impossibility defense so long as the action's impact
upon public contracts is, as in Horowitz, merely incidental to the
accomplishment of a broader governmental objective. See O'Neill v.
United States, 231 Ct. Cl. 823, 926 (1982) (noting that the sovereign
acts doctrine recognizes that "the Government's actions, otherwise
legal, will occasionally incidentally impair the performance of
contracts").44 The greater the Government's self-interest, however,
the more suspect becomes the claim that its private contracting partners
ought to bear the financial burden of the Government's own
improvidence, and where a substantial part of the impact of the
Government's action rendering performance impossible falls on its
own contractual obligations, the defense will be unavailable. Cf. Sun
Oil Co. v. United States, 215 Ct. Cl. 716, 768, 572 F. 2d 786, 817
(1978) (rejecting sovereign acts defense where the Secretary of the
Interior's actions were "`directed principally and primarily at
plaintiffs' contractual right'").45
The dissent would adopt a different rule that the Government's dual
roles of contractor and sovereign may never be treated as fused,
relying upon Deming's pronouncement that "[t]he United States as a
contractor are not responsible for the United States as a lawgiver."
Post, at 9 (quoting 1 Ct. Cl., at 191). But that view would simply
eliminate the "public and general" requirement, which presupposes
that the Government's capacities must be treated as fused when the
Government acts in a non-general way. Deming itself twice refers to
the "general" quality of the enactment at issue, 1 Ct. Cl., at 191, and
notes that "[t]he statute bears upon [the governmental contract] as it
bears upon all similar contracts between citizens, and affects it in no
other way." Ibid. At the other extreme, of course, it is clear that any
benefit at all to the Government will not disqualify an act as "public
and general"; the silk embargo in Horowitz, for example, had the
incidental effect of releasing the Government from its contractual
obligation to transport Mr. Horowitz's shipment. Our holding that a
governmental act will not be public and general if it has the substantial
effect of releasing the Government from its contractual obligations
strikes a middle course between these two extremes.46
In the present case, it is impossible to attribute the exculpatory "public
and general" character to FIRREA. Although we have not been told
the dollar value of the relief the Government would obtain if insulated
from liability under contracts such as these, the attention given to the
regulatory contracts prior to passage of FIRREA shows that a
substantial effect on governmental contracts is certain. The statute not
only had the purpose of eliminating the very accounting gimmicks that
acquiring thrifts had been promised, but the specific object of
abrogating enough of the acquisition contracts as to make that
consequence of the legislation a focal point of the congressional
debate.47 Opponents of FIRREA's new capital requirements
complained that "[i]n its present form, [FIRREA] would abrogate
written agreements made by the U. S. government to thrifts that
acquired failing institutions by changing the rules in the middle of the
game." 135 Cong. Rec. H2783 (June 15, 1989) (Statement of Rep.
Ackerman). Several congressmen observed that, "[s]imply put,
[Congress] has reneged on the agreements that the government entered
into concerning supervisory goodwill." House Report, at 498
(additional views of Reps. Annunzio, Kanjorski, and Flake).48 A
similar focus on the supervisory merger contracts is evident among
proponents of the legislation; Representative Rostenkowski, for
example, insisted that "the Federal Government should be able to
change requirements when they have proven to be disastrous and
contrary to the public interest. The contracts between the savings and
loan owners when they acquired failing institutions in the early 1980's
are not contracts written in stone." 135 Cong. Rec., at H2717 (June
15, 1989).49
This evidence of intense concern with contracts like the ones before us
suffices to show that FIRREA had the substantial effect of releasing
the Government from its own contractual obligations. Congress
obviously expected FIRREA to have such an effect, and in the
absence of any evidence to the contrary we accept its factual judgment
that this would be so.50 Nor is Congress's own judgment
neutralized by the fact, emphasized by the Government, that FIRREA
did not formally target particular transactions. Legislation can almost
always be written in a formally general way, and the want of an
identified target is not much security when a measure's impact
nonetheless falls substantially upon the Government's contracting
partners. For like reason, it does not answer the legislative record to
insist, as the Government does, that the congressional focus is
irrelevant because the broad purpose of FIRREA was to "advance the
general welfare." Brief for United States 45. We assume nothing less
of all congressional action, with the result that an intent to benefit the
public can no more serve as a criterion of a "public and general"
sovereign act than its regulatory character can.51 While our limited
enquiry into the background and evolution of the thrift crisis leaves us
with the understanding that Congress acted to protect the public in the
FIRREA legislation, the extent to which this reform relieved the
Government of its own contractual obligations precludes a finding that
the statute is a "public and general" act for purposes of the sovereign
acts defense.52
Even if FIRREA were to qualify as "public and general," however,
other fundamental reasons would leave the sovereign acts doctrine
inadequate to excuse the Government's breach of these contracts. As
Horowitz makes clear, that defense simply relieves the Government as
contractor from the traditional blanket rule that a contracting party may
not obtain discharge if its own act rendered performance impossible.
But even if the Government stands in the place of a private party with
respect to "public and general" sovereign acts, it does not follow that
discharge will always be available, for the common-law doctrine of
impossibility imposes additional requirements before a party may
avoid liability for breach. As the Restatement puts it,
"[w]here, after a contract is made, a party's performance is made
impracticable without his fault by the occurrence of an event the non-
occurrence of which was a basic assumption on which the contract
was made, his duty to render that performance is discharged, unless
the language or the circumstances indicate the contrary." Restatement
(Second) of Contracts Section 261.
See also 2 Farnsworth on Contracts Section 9.6, at 543-544 (listing
four elements of the impossibility defense). Thus, since the object of
the sovereign acts defense is to place the Government as contractor on
par with a private contractor in the same circumstances, Horowitz,
267 U. S., at 461, the Government, like any other defending party in
a contract action, must show that the passage of the statute rendering
its performance impossible was an event contrary to the basic
assumptions on which the parties agreed, and must ultimately show
that the language or circumstances do not indicate that the Government
should be liable in any case. While we do not say that these
conditions can never be satisfied when the Government contracts with
participants in a regulated industry for particular regulatory treatment,
we find that the Government as such a contractor has not satisfied the
conditions for discharge in the present case.
For a successful impossibility defense the Government would have to
show that the nonoccurrence of regulatory amendment was a basic
assumption of these contracts. See, e.g., Restatement (Second) of
Contracts Section 261; 2 Farnsworth, supra, Section 9.6, at 549-550.
The premise of this requirement is that the parties will have bargained
with respect to any risks that are both within their contemplation and
central to the substance of the contract; as Justice Traynor said, "[i]f
[the risk] was foreseeable there should have been provision for it in
the contract, and the absence of such a provision gives rise to the
inference that the risk was assumed." Lloyd v. Murphy, 25 Cal. 2d
48, 54, 153 P.2d 47, 50 (1944).53 That inference is particularly
compelling, where, as here, the contract provides for particular
regulatory treatment (and, a fortiori, allocates the risk of regulatory
change). Such an agreement reflects the inescapable recognition that
regulated industries in the modern world do not live under the law of
the Medes and the Persians, and the very fact that such a contract is
made at all is at odds with any assumption of regulatory stasis. In this
particular case, whether or not the reach of the FIRREA reforms was
anticipated by the parties, there is no doubt that some changes in the
regulatory structure governing thrift capital reserves were both
foreseeable and likely when these parties contracted with the
Government, as even the Government agrees. It says in its brief to
this Court that "in light of the frequency with which federal capital
requirements had changed in the past . . . , it would have been
unreasonable for Glendale, FSLIC, or the Bank Board to expect or
rely upon the fact that those requirements would remain unchanged."
Brief for United States 26; see also id., at 3, n. 1 (listing the
changes).54 The Federal Circuit panel in this case likewise found
that the regulatory capital requirements "have been the subject of
numerous statutory and regulatory changes over the years," and
"changed three times in 1982 alone." 994 F. 2d, at 801.55 Given
these fluctuations, and given the fact that a single modification of the
applicable regulations could, and ultimately did, eliminate virtually all
of the consideration provided by the Government in these
transactions, it would be absurd to say that the nonoccurrence of a
change in the regulatory capital rules was a basic assumption upon
which these contracts were made. See, e.g., Moncrief v. Williston
Basin Interstate Pipeline Co., 880 F. Supp. 1495, 1508 (DWyo.
1995); Vollmar v. CSX Transportation, Inc., 705 F. Supp. 1154,
1176 (EDVa. 1989), aff'd, 898 F. 2d 413 (CA4 1990).
Finally, any governmental contract that not only deals with regulatory
change but allocates the risk of its occurrence will, by definition, fail
the further condition of a successful impossibility defense, for it will
indeed indicate that the parties' agreement was not meant to be
rendered nugatory by a change in the regulatory law. See Restatement
(Second) of Contracts Section 261 (no impossibility defense where
the "language or the circumstances" indicate allocation of the risk to
the party seeking discharge).56 The mere fact that the Government's
contracting agencies (like the Bank Board and FSLIC) could not
themselves preclude Congress from changing the regulatory rules
does not, of course, stand in the way of concluding that those
agencies assumed the risk of such change, for determining the
consequences of legal change was the point of the agreements. It is,
after all, not uncommon for a contracting party to assume the risk of
an event he cannot control,57 even when that party is an agent of the
Government. As the Federal Circuit has recognized, "[government]
contracts routinely include provisions shifting financial responsibility
to the Government for events which might occur in the future. That
some of these events may be triggered by sovereign government
action does not render the relevant contractual provisions any less
binding than those which contemplate third party acts, inclement
weather and other force majeure." Hughes Communications Galaxy,
Inc. v. United States, 998 F. 2d 953, 958-959 (CA Fed. 1993).58
As to each of the contracts before us, our agreement with the
conclusions of the Court of Federal Claims and the Federal Circuit
forecloses any defense of legal impossibility, for those courts found
that the Bank Board resolutions, Forbearance Letters, and other
documents setting forth the accounting treatment to be accorded
supervisory goodwill generated by the transactions were not mere
statements of then-current regulatory policy, but in each instance were
terms in an allocation of risk of regulatory change that was essential to
the contract between the parties. See supra, at 21-23. Given that the
parties went to considerable lengths in procuring necessary documents
and drafting broad integration clauses to incorporate their terms into
the contract itself, the Government's suggestion that the parties meant
to say only that the regulatory treatment laid out in these documents
would apply as an initial matter, subject to later change at the
Government's election, is unconvincing. See ibid. It would, indeed,
have been madness for respondents to have engaged in these
transactions with no more protection than the Government's reading
would have given them, for the very existence of their institutions
would then have been in jeopardy from the moment their agreements
were signed.
We affirm the Federal Circuit's ruling that the United States is liable to
respondents for breach of contract. Because the Court of Federal
Claims has not yet determined the appropriate measure or amount of
damages in this case, we remand for further proceedings consistent
with our opinion.
It is so ordered.
ENDNOTES
1 The easing of federal regulatory requirements was accompanied by
similar initiatives on the state level, especially in California, Florida,
and Texas. The impact of these changes was substantial, since as of
1980 over 50 percent of federally-insured thrifts were chartered by the
States. See House Report, at 297.
2 "Regulatory and statutory accounting gimmicks included permitting
thrifts to defer losses from the sale of assets with below market yields;
permitting the use of income capital certificates, authorized by
Congress, in place of real capital; letting qualifying mutual capital
certificates be included as RAP capital; allowing FSLIC members to
exclude from liabilities in computing net worth, certain contra-asset
accounts, including loans in process, unearned discounts, and
deferred fees and credits; and permitting the inclusion of net worth
certificates, qualifying subordinated debentures and appraised equity
capital as RAP net worth." House Report, at 298. The result of these
practices was that "[b]y 1984, the difference between RAP and GAAP
net worth at S&L's stood at $9 billion," which meant "that the
industry's capital position, or . . . its cushion to absorb losses was
overstated by $9 billion." Ibid.
3 See also ibid. (noting that "[t]he FSLIC developed lists of
prospective acquirers, made presentations, held seminars, and
generally tried to promote the acquisitions of these insolvents");
Grant, The FSLIC: Protection through Professionalism, 14 Federal
Home Loan Bank Board Journal 9-10 (Feb. 1981) (describing the
pros and cons of various default-prevention techniques from FSLIC's
perspective). Over 300 such mergers occurred between 1980 and
1986, as opposed to only 48 liquidations. GAO, Forbearance for
Troubled Institutions 13. There is disagreement as to whether the
government actually saved money by pursuing this course rather than
simply liquidating the insolvent thrifts. Compare, e.g., Brief for
Franklin Financial Group, Inc., et al. as Amicus Curiae 7, quoting
Remarks by H. Brent Beasley, Director of FSLIC, before the
California Savings and Loan League Management Conference (Sept.
9, 1982) (concluding that FSLIC-assisted mergers have
"`[h]istorically . . . cost about 70% of [the] cost of liquidation'"), with
GAO, Solutions to the Thrift Industry Problem 52 ("FSLIC's cost
analyses may . . . understat[e] the cost of mergers to the
government").
4 See also Accounting Principles Board Opinion No. 17, Paragraph
26, p. 339 (1970) (providing that "[i]ntangible assets acquired . . . as
part of an acquired company should... be recorded at cost," which for
unidentifiable intangible assets like goodwill is "measured by the
difference between the cost of the . . . enterprise acquired and the sum
of the assigned costs of individual tangible and identifiable intangible
assets acquired less liabilities assumed").
5 See Newark Morning Ledger Co. v. United States, 507 U. S. 546,
556 (1993) (describing "goodwill" as "the total of all the imponderable
qualities that attract customers to the business"). Justice Story defined
"good-will" somewhat more elaborately as "the advantage or benefit,
which is acquired by an establishment, beyond the mere value of the
capital, stock, funds, or property employed therein, in consequence of
the general public patronage and encouragement, which it receives
from constant or habitual customers, on account of its local position,
or common celebrity, or reputation for skill or affluence, or
punctuality, or from other accidental circumstances, or necessities, or
even from ancient partialities, or prejudices." J. Story, Law of
Partnership Section 99, p. 139 (1841).
6 See also 135 Cong. Rec. H2703 (daily ed. June 16, 1989)
(statement of Rep. Hyde) (observing that FSLIC used goodwill as "an
inducement to the healthy savings and loans to merge with the sick
ones"); Brief of Franklin Financial Group, Inc., et al. as Amicus
Curiae 9, quoting Deposition of Thurman Connell, former official at
the Atlanta Federal Home Loan Bank, in Charter Federal Savings
Bank v. Office of Thrift Supervision, Joint Appendix Nos. 91-2647,
91-2708 (CA4), p. 224 (recognizing that treating supervisory
goodwill as regulatory capital was "`a very important aspect of [the
acquiring thrifts'] willingness to enter into these agreements,'" and
concluding that the regulators "`looked at [supervisory goodwill] as
kind of the engine that made this transaction go. Because without it,
there wouldn't have been any train pulling out of the station, so to
speak'").
7 In this context, "amortization" of an intangible asset is equivalent to
depreciation of tangible assets. See Newark Morning Ledger Co. v.
United States, 507 U. S., at 571, n. 1 (1993) (SOUTER, J.,
dissenting); Gregorcich, Amortization of Intangibles: A Reassessment
of the Tax Treatment of Purchased Goodwill, 28 Tax Lawyer 251,
253 (1975). Both the majority opinion and dissent in Newark
Morning Ledger agreed that "goodwill" was not subject to
depreciation (or amortization) for federal tax purposes, see 507 U. S.,
at 565, n. 13; id., at 573 (SOUTER, J., dissenting), although we
disagreed as to whether one could accurately estimate the useful life of
certain elements of goodwill and, if so, permit depreciation of those
elements under Internal Revenue Service regulations. Id., at 566-567;
id., at 576-577 (SOUTER, J., dissenting). Neither of the Newark
Morning Ledger opinions, however, denied the power of another
federal agency, such as the Bank Board or FSLIC, to decide that
goodwill is of transitory value and impose a particular amortization
period to be used for its own regulatory purposes.
8 See also National Commission on Financial Institution Reform,
Recovery and Enforcement, Origins and Causes of the S&L Debacle:
A Blueprint for Reform, A Report to the President and Congress of
the United States 38-39 (July 1993) (explaining the advantages of
different amortization and accretion schedules to an acquiring thrift).
The downside of a faster accretion schedule, of course, was that it
exhausted the discount long before the goodwill asset had been fully
amortized. As a result, this treatment resulted in a net drag on
earnings over the medium and long terms. See Lowy 40-41; Black,
Ending Our Forebearers' Forbearances: FIRREA and Supervisory
Goodwill, 2 Stan. L. & Policy Rev. 102, 104-105 (1990). Many
thrift managers were apparently willing to take the short term gain, see
Lowy 40-41, and others sought to stave off the inevitable losses by
pursuing further acquisitions, see Black, supra, at 105.
9 The 1981 regulations quoted above were in effect at the time of the
Glendale transaction. The 1984 regulations relevant to the Winstar
transaction were identical in all material respects, and although
substantial changes had been introduced into Section 563.13 by the
time of the Statesman merger in 1988, they do not appear to resolve
the basic ambiguity as to whether goodwill could qualify as regulatory
capital. See 12 CFR Section 563.13 (1988). Section 563.13 has since
been superseded by the Financial Institutions Reform, Recovery, and
Enforcement Act.
10 Although the Glendale transaction in this case occurred before the
promulgation of SFAS 72 in 1983, the proper amortization period for
goodwill under GAAP was uncertain prior to that time. According to
one observer, "when the accounting profession designed the purchase
accounting rules in the early 1970s, they didn't anticipate the case of
insolvent thrift institutions . . . . The rules for that situation were
simply unclear until September 1982," when the SFAS 72 rules were
first aired. Lowy 39-40.
11 See 135 Cong. Rec. 18863 (1989) (Sen. Riegle) (emphasizing that
these capital requirements were at the "heart" of the legislative reform);
id., at 18860 (Sen. Chafee) (describing capital standards as
FIRREA's "strongest and most critical requirement" and "the
backbone of the legislation"); id., at 18853 (Sen. Dole) (describing the
"[t]ough new capital standards [as] perhaps the most important
provisions in this bill").
12 Glendale's premerger net worth amounted to 5.45 percent of its
total assets, which comfortably exceeded the 4 percent capital/asset
ratio, or net worth requirement, then in effect. See 12 CFR Section
563.13(a)(2) (1981).
13 See also Appleby v. Delaney, 271 U. S. 403, 413 (1926) ("It is
not reasonable to suppose that the grantees would pay $12,000 . . .
and leave to the city authorities the absolute right completely to nullify
the chief consideration for seeking this property, . . . or that the
parties then took that view of the transaction").
14 As part of the contract, the Government's promise to count
supervisory goodwill and capital credits toward regulatory capital was
alterable only by written agreement of the parties. See App. 408.
This was also true of the Glendale and Winstar transactions. See id.,
at 112, 600.
15 To be sure, each side could have eliminated any serious contest
about the correctness of their interpretive positions by using clearer
language. See, e.g., Guaranty Financial Services, Inc. v. Ryan, 928
F. 2d 994, 999-1000 (CA11 1991) (finding, based on very different
contract language, that the Government had expressly reserved the
right to change the capital requirements without any responsibility to
the acquiring thrift). The failure to be even more explicit is perhaps
more surprising here, given the size and complexity of these
transactions. But few contract cases would be in court if contract
language had articulated the parties' postbreach positions as clearly as
might have been done, and the failure to specify remedies in the
contract is no reason to find that the parties intended no remedy at all.
The Court of Claims and Federal Circuit were thus left with the
familiar task of determining which party's interpretation was more
nearly supported by the evidence.
16 See also Day v. United States, 245 U. S. 159, 161 (1917)
(Holmes, J.) ("One who makes a contract never can be absolutely
certain that he will be able to perform it when the time comes, and the
very essence of it is that he takes the risk within the limits of his
undertaking").
17 See, e.g., Hughes Communications Galaxy, Inc. v. United States,
998 F. 2d 953, 957-959 (CA Fed. 1993) (interpreting contractual
incorporation of then-current government policy on space shuttle
launches not as a promise not to change that policy, but as a promise
"to bear the cost of changes in launch priority and scheduling resulting
from the revised policy"); Hills Materials Co. v. Rice, 982 F. 2d 514,
516-517 (CA Fed. 1992) (interpreting contract to incorporate safety
regulations extant when contract was signed and to shift responsibility
for costs incurred as a result of new safety regulations to the
Government); see generally 18 W. Jaeger, Williston on Contracts
Section 1934, at 19-21 (3d ed. 1978) ("Although a warranty in effect
is a promise to pay damages if the facts are not as warranted, in terms
it is an undertaking that the facts exist. And in spite of occasional
statements that an agreement impossible in law is void there seems no
greater difficulty in warranting the legal possibility of a performance
than its possibility in fact.... [T]here seems no reason of policy
forbidding a contract to perform a certain act legal at the time of the
contract if it remains legal at the time of performance, and if not legal,
to indemnify the promisee for non-performance" (footnotes omitted));
5A A. Corbin, Corbin on Contracts Section 1170, p. 254 (1964)
(noting that in some cases where subsequent legal change renders
contract performance illegal, "damages are still available as a remedy,
either because the promisor assumed the risk or for other reasons,"
but specific performance will not be required).
18 See also H. L. A. Hart, The Concept of Law 145 (1961)
(recognizing that Parliament is "sovereign, in the sense that it is free,
at every moment of its existence as a continuing body, not only from
legal limitations imposed ab extra, but also from its own prior
legislation").
19 See also Reichelderfer v. Quinn, 287 U. S. 315, 318 (1932)
("[T]he will of a particular Congress . . . does not impose itself upon
those to follow in succeeding years"); Black, Amending the
Constitution: A Letter to a Congressman, 82 Yale L. J. 189, 191
(1972) (characterizing this "most familiar and fundamental principl[e]"
as "so obvious as rarely to be stated").
20 See also Stone v. Mississippi, 101 U. S. 814 (1880) (State may
not contract away its police power); Butchers' Union Slaughter-House
& Livestock Landing Co. v. Crescent City Livestock Landing &
Slaughterhouse Co., 111 U. S. 746 (1884) (same); see generally
Griffith, Local Government Contracts: Escaping from the
Governmental/Proprietary Maze, 75 Iowa L. Rev. 277, 290-299
(1990) (recounting the early development of the reserved powers
doctrine). We discuss the application of the reserved powers doctrine
to this case infra, at 49-50.
21 United Railways is in the line of cases stretching back to
Providence Bank v. Billings, 4 Pet. 514 (1830), and Charles River
Bridge v. Warren Bridge, 11 Pet. 420 (1837). Justice Day's opinion
in United Railways relied heavily upon New Orleans City & Lake R.
Co. v. New Orleans, 143 U. S. 192 (1892), which in turn relied upon
classic Contract Clause unmistakability cases like Vicksburg S. & P.
R. Co. v. Dennis, 116 U. S. 665 (1886), Memphis Gas Light Co. v.
Taxing Dist. of Shelby Cty., 109 U. S. 398 (1883), and Piqua
Branch of State Bank of Ohio v. Knoop, 16 How. 369 (1854). And
Home Building & Loan Assn. v. Blaisdell, 290 U. S. 398 (1934),
upon which Merrion also relied, cites Charles River Bridge directly.
See 290 U. S., at 435; see also Note, Forbearance Agreements:
Invalid Contracts for the Surrender of Sovereignty, 92 Colum. L.
Rev. 426, 453 (1992) (linking the unmistakability principle applied in
Bowen v. Public Agencies Opposed to Social Security Entrapment,
477 U. S. 41 (1986), to the Charles River Bridge/Providence Bank
line of cases).
22 "Sovereign power" as used here must be understood as a power
that could otherwise affect the Government's obligation under the
contract. The Government could not, for example, abrogate one of its
contracts by a statute abrogating the legal enforceability of that
contract, government contracts of a class including th |