Cooper & Kirk

Wishing on Winstar

S&L case may light the way for utility, housing suits

ABA JOURNAL - NOVEMBER, 1998
By: Steve France

84 A.B.A.J. 38

In June 1996, Charles J. Cooper won a big Supreme Court breach of contract case against the United States for breaking promises made to encourage takeovers of ailing savings and loans. Just how big is still being decided by lower courts on remand, but the government's latest estimate of its potential liability is about $32 billion.

The $64 billion question (give or take a few billion) is whether the 7?2 decision in United States v. Winstar Corp., 116 S. Ct. 2432, will have the legs to go much beyond the 1980s thrift?crisis cases that generated it.

More than 100 of the S&L cases are still before the Court of Federal Claims to determine what damages the government owes thrift owners. They sued after Congress enacted legislation that, among other things, rescinded special accounting treatment encouraging solvent thrifts to merge with their failing counterparts.

Cooper and his firm, Cooper, Carvin & Rosenthal in Washington, D.C., represent the owners of 17 thrifts with Winstar claims, two of which have settled for $39 million total. But his eye is on even bigger game. Using Winstar as ammunition, he is wielding the precedent in high?stakes controversies outside the federal sphere.

Monopoly Money

Most notably Cooper is pressing claims on behalf of one telephone company and four electric utilities that are demanding billions of dollars in states where deregulation has eliminated the industries' old, profitable monopolies.

"Any time the government gives you its word in a commercial context and you reasonably rely [on it] and invest your money, you can point to Winstar," Cooper says.

He maintains that Congress cannot detract from the letter and spirit of agreements regulators made in different circumstances, even when responding to a major economic and fiscal crisis. The remedy for interference with such regulatory contracts is contractual damages, he says.

Much of the Winstar opinion concerned the unmistakability doctrine, which holds that any government surrender of sovereign authority must be made in unmistakable terms. Justice David Souter's plurality opinion, joined by three justices, held that the doctrine does not apply when the government simply agrees to insure a business against the risk of future changes in law or regulations.

Justice Antonin Scalia, joined by two others in an opinion concurring in the judgment, said the doctrine applies, but it is merely a presumption that the government does not commonly agree to curb its future sovereign power to change the law. In this case, the presumption was overcome.

"The ruling in Winstar was highly technical," says Joshua I. Schwartz, a government contracts professor at George Washington University Law School. The federal government has been liable for damages in contracts since the Tucker Act passed more than 100 years ago, he notes. "Winstar is a small correction at the margins of a large body of case law establishing when the government, acting as sovereign, benefits from certain special defenses."

The case does not apply directly to nonfederal claims, Schwartz notes, and only helps parties that can prove they have a contract that provides for damages in the event of an adverse change in the law.

Schwartz's law school colleague, Richard Pierce, an expert in utility regulation, heaps scorn on what he calls the half-baked argument that Winstar supports utilities' claims against states and municipalities.

Cooper says the utilities had clear regulatory contracts to provide universal electricity service at regulated rates in return for protection of their monopolies. While lawmakers are free to change that regulatory regime and introduce competition, under Winstar they must pay for breaching their side of the deal. The only issue is how to calculate the companies' government? induced "stranded costs."

Scoffing at this view, Pierce says utilities, unlike the thrifts in Winstar, do not have formal, explicit contracts promising them monopoly status. "All the utilities have are a series of regulatory orders and a set of mutual expectations," he says.

A Level Paying Field

Litigators on both sides of government contract battles may be more inclined to see Winstar as a trend-setting case.

"The importance for lawyers outside the S&L area," says Harry J. Kelly III of Peabody & Brown in Washington, D.C., "is that Winstar leveled the playing field when you are up against the government in a murky contract battle."

When Winstar was decided, Kelly was locked in combat with Department of Justice lawyers on behalf of developers of low?income housing who claim Congress took away their right to prepay 40?year federally subsidized mortgages on projects.

The developers had agreed to build, in part because they could pay off the loans in 20 years and then charge higher market rents. In 1987, just before the 20 years were up, Congress barred prepayment to keep the developers from raising the rent on as many as 300,000 poor tenants.

To Kelly, who represents about 60 properties in two lawsuits, and to hundreds of other similarly affected developers, Winstar was like manna from heaven. About 800 plaintiffs have filed suit against the government seeking damages of about $500 million for changing the prepayment rule, according to a Justice Department spokesman.

The plaintiffs are counting on Winstar to stop the government's lawyers from brandishing their client's sovereign power to require courts to construe any ambiguities in their favor.

Before Winstar, lower courts had split on the validity of the developers' claims. But a big ruling from the U.S. Court of Appeals for the Federal Circuit is due any day in another case raising the same issues, Cienega Gardens v. United States, No. 94-1C.

Cienega Gardens involves 35 housing projects, according to plaintiffs counsel Leonard Zax of the Washington, D.C., office of Latham & Watkins. Kelly's cases are stayed pending the outcome.

What dismays one government litigator involved in Winstar matters is less the justices' reformulation of doctrine than their view of the facts in the S&L cases. Seven justices accepted lower court determinations that regulatory accounting arrangements made with solvent thrifts were clear promises to indemnify them when Congress later tightened up thrift rules.

"If you accept Souter's melodrama of what the deal was, you almost have to agree with the outcome," the Justice Department lawyer says, speaking on condition of anonymity.

But thrift regulators, in fact, never agreed to that deal, he says, and thrift owners knew there was a high risk the government would change the accounting rules.

Government lawyers gazing at the fiscal crater wrought by Winstar are not sure how much impact the case will have.

Did the justices take a business-friendly view of the facts merely because of Cooper's skilled advocacy? Or is the Court more inclined to protect business expectations than it has been since it reconciled itself to the New Deal 60 years ago?

Time will tell whether Winstar was merely a flash in the pan enforcing one particular, if very costly, deal with savings and loans or a true star guiding business to a new deal with government.