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Winstar and the Need to Reconceptualize the Law of Regulatory Agreements Alan R

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Winstar and the Need to Reconceptualize the Law of Regulatory Agreements Alan R Kentucky Law Journal Volume 88 | Issue 2 Article 3 1999 Purchasing the Right to Govern: Winstar and the Need to Reconceptualize the Law of Regulatory Agreements Alan R. Burch Office ofh t e Comptroller of the Currency Follow this and additional works at: https://uknowledge.uky.edu/klj Part of the Banking and Finance Law Commons, and the Contracts Commons Click here to let us know how access to this document benefits oy u. Recommended Citation Burch, Alan R. (1999) "Purchasing the Right to Govern: Winstar and the Need to Reconceptualize the Law of Regulatory Agreements," Kentucky Law Journal: Vol. 88 : Iss. 2 , Article 3. Available at: https://uknowledge.uky.edu/klj/vol88/iss2/3 This Article is brought to you for free and open access by the Law Journals at UKnowledge. It has been accepted for inclusion in Kentucky Law Journal by an authorized editor of UKnowledge. For more information, please contact [email protected]. Purchasing the Right to Govern: Winstar and the Need to Reconceptualize the Law of Regulatory Agreements BY ALAN R. BURCH* TABLE OF CONTENTS INTRODUCTION ...................................... 247 I. UNITED STATES V WINSTAR CORP ...................... 255 A. Background ...................................... 255 1. The Savings and Loan Crisis ..................... 255 2. Arguments Raised in Winstar ..................... 259 B. Reserved PowersDoctrine .......................... 261 C. UnmistakabilityDoctrine ........................... 266 1. UnmistakabilityDoctrine Cases .................. 267 a. Strength of the InterpretivePresumption ........ 267 b. Failureto Define When UnmistakabilityDoctrine Applies ................................... 273 c. Federal Unmistakability Cases ................ 281 2. The Government's Reputation as ContractingPartner . 294 3. The UnmistakabilityDoctrine ShouldHave Given Mixed Results in Winstar ........................ 298 4. Winstar All But Erases the UnmistakabilityDoctrine .. 300 a. Souter Lets the PlaintiffsAvoid the Unmistakability Doctrine .................................. 300 SeniorAttorney, Office of the Comptroller ofthe Currency, Washington, D.C. J.D., MA. (History) 1994, University of Virginia. The opinions expressed herein are those of the author and do not necessarily represent the policies of the Office of the Comptroller of the Currency or the U.S. Treasury Department, or the opinions of any government officials. I would like to thank Patrick Crawford for his generous help, and Andrea Levine for her consistent support. All errors remain my own. 245 KENTUCKY LAW JOURNAL [VOL. 88 b. The Plurality'sRule is Inconsistent with Unmistakability Case Law andNeighboring Jursiprudenceof Economic Due Process ........ 308 c. The ConcurrencesofBreyer and Scalia Fearthe UnmistakabilityDoctrine Allows the Government to Make Illusory Promises .................... 315 d. Rehnquist's Dissent ......................... 318 e. ConcludingRemarks on Unmistakability ........ 320 D. Express DelegationDoctrine ........................ 323 1. Express DelegationDoctrine Cases ................ 326 2. The UpdatedExpress DelegationDoctrine Should Have Shielded the Governmentfrom Liability in Winstar ...................................... 334 3. Souter's Summary Dismissalof the Express DelegationDoctrine ............................ 337 E. The Sovereign Acts Doctrine ........................ 346 1. Origins and Critique of the Sovereign Acts Doctrine .. 347 2. The Sovereign Acts Doctrine Should Have Been an Easy Loserfor the Government in Winstar .......... 355 3. The Likely PurposeBehind Souter's Lengthy Treatment of the Sovereign Acts Doctrine ........... 358 4. Scalia'sAnalysis of the Sovereign Acts Doctrine ..... 370 F. The Implications ofWinstar ......................... 372 II. PROPOSED FRAMEWORK TO DECIDE WHEN A GOVERNMENT AGENCY MAY RAISE SPECIAL CONTRACT DEFENSES ........ 378 A. A Critique ofProfessorSchwartz's Integrationof the Defenses ........................................ 380 B. A ProposedFrameworkfor the Special ContractDefenses. 385 C. DistinguishingBetween Sovereign and Private Capacities of Government .................................... 387 1. Suggested Factorsfor DistinguishingBetween the Sovereign and PrivateRoles of Government ......... 394 2. Conventional Wisdom Has No Theoryfor the Enforcement ofRegulatory Agreements Other than Private Contract Theory ......................... 400 3. Reconciling the Recommended Factors with Supreme CourtPrecedent ............................... 403 D. The FourDefenses within the ProposedFramework ...... 413 CONCLUSION ........................................ 419 1999-2000] PURCHASING THE RIGHT TO GOVERN INTRODUCTION n United States v. Winstar Corp.,' the Supreme Court found the federal government liable under the Tucker Act for breach of contract. The Court found that the government had entered into contracts with the owners of savings and loans ("S&L"s) regarding the thrifts' capital accounting when the thrift regulators approved mergers of the thrifts. Several years later, Congress enacted stricter capital rules as part of its broad reform of the S&L industry. The Court found that this new legislationbreachedthe contracts representedby the regulatory approvals.2 Understood simply as a contracts case, Winstar appears reasonable, even as it creates a new presumption that the government will pay damages when it changes regulatory policies reflected in agreements. But Winstar is also about sovereign power, for both the approvals of the mergers and the subsequent capital rules represent examples of the government directly exercisingregulatory authority. From this perspective, Winstar poses the question of how far the current majority, as represented by Congress, may go in altering or rescinding agreements made by previous majorities. It also raises the question of how easily a regulatory agency may bind the government as a whole, including Congress, to particular agreements and regulatory policies. The sovereign power perspective suggests a due process analysis, including administrative law principles due to involvement of a government agency. The sovereign power perspective suggests a far more permissive standard than that applied by the Court in Winstar. The simple fact that the regulatory approval was reduced to a written document, consented to by both the thrifts and the regulators, however, creates the puzzling ambiguity that the contractual perspective and the sovereign power perspective each make sense in isolation, even though they suggest quite different legal standards. Ultimately, making sense of 3 the law of regulatory agreements requires analyzing both perspectives. This Article criticizes the Winstar Court for relying too simply on the contractual analysis and using that perspective to subtly manipulate its precedent and lay the groundwork for a conservative regulatory takings 'United States v. Winstar Corp., 518 U.S. 839 (1996). 2 See id. at 909-10. 3 See generally Jones v. United States, 1 Ct C1. 383, 384 (1865) ("The two characters which the government possesses as a contractor and as sovereign cannot be thus fused; nor can the United States while sued in one character be made liable in damages for their acts done in the other."). KENTUCKY LAW JOURNAL [VOL. 88 agenda. By ignoring the implicit threshold issue of which perspective makes more sense, the Court leaves open the possibility that its new presumption of damages will apply to anything that could be styled as an agreement, be it administrative enforcement orders, regulatory approvals, or even run-of-the-mill licenses and permits. Much like the conservative regulatory takings agenda, this regime would force the current majority to buy its way out of outdated regulatory policies. The law of regulatory agreements, as discussed herein, consists of the four special contract defenses, available only to the government, raised in the Winstarcase. 4 For each of these defenses, Part I of this Article reviews the case law establishing the defense, critiques the defense as it existed prior to Winstar, and then evaluates the Court's analysis of the defense.5 The first of these special defenses-the unmistakability doctrine-is essentially a rule of strict construction that presumes that the government, in making an agreement regarding its regulation of a private party, has not promised to restrain future use of its sovereign power, unless the intent to do so appears unmistakably clearly in the agreement. The unmistakability doctrine seeks to protect the current majority's ability to revise and change outdated policies, but still allows a way for the government to bind future governments. Given the power ofthe unmistakability doctrine to excuse the government from contract liability, there is an obvious but largely unresolved question of how to properly limit the circumstances where the government may raise the doctrine. The unmistakability doctrine dominates the Court's four opinions in Winstar.Part I ofthis Article provides an extensive review ofthe precedent establishing the unmistakability doctrine, in order to better illuminate the Court's manipulation of the precedent. The Court establishes a new rule that is essentially the opposite presumption: that the government has promised to pay damages if any future use of its sovereign power results in a different regulatory policy than the one set forth inthe prior agreement. This presumption does not prevent outright the subsequent government from enacting new legislation, but it does force the government to pay damages to
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