Jeff H. Eckland, Esq.
Faegre and Benson, LLP
Minneapolis, MN
612-766-7060
Supreme Court Decision a Major
Victory for Government Contractors
UNANIMOUS U.S. SUPREME
COURT ALLOWS GOVERNMENT CONTRACTORS TO ENFORCE CONTRACTS, RECLAIM LOST INCOME
High Court decision expected to have
far-reaching impact in other industries that conduct business with the
federal government
In June 2002, the U.S. Supreme Court ruled in Franconia Associates vs. United
States that private owners of Section 515 affordable housing have the right
to enforce their contracts with the U.S. government and seek compensation for
lost income.
In its decision, the High Court applied the same, ordinary principles of
law to the U.S. government as it applies to U.S. citizens when it ruled that
the owners could enforce contracts they entered into with the Farmer’s Home
Administration as long as 30 years ago. Writing for a unanimous Court,
Justice Ruth Bader Ginsburg stated, “‘The United States does business on
business terms.’”
The Supreme Court’s decision in Franconia Associates is expected to
impact not only Section 515 owners but also other industries that conduct
business with the federal government and are affected by legislative,
regulatory, and other changes involving contracts with the United States and
its agencies.
“The Franconia Associates opinion today joins the ranks of the Supreme
Court’s recent significant decisions Winstar and Mobil Oil Exploration in
holding that when the United States government chooses to do business with
its citizens, it must do so under ordinary principles of law,” said Jeff
Eckland of Faegre & Benson, who argued for the petitioners before the High
Court. “This case shows that when you change the rules in the middle of a
deal — even if you are the federal government — you are still accountable to
the same contract rules as everyone else.”
The 9-0 decision was a victory for Franconia Associates, who argued that
the owners should have the right to reclaim lost income from the date they
decided to prepay their government mortgage and were denied the opportunity
to do so — not from the effective date (1988) of Congress’ Emergency Low
Income Housing Preservation Act (ELIHPA), the legislation that made it more
difficult for owners to opt out of the program.
The U.S. Supreme Court sided with Franconia Associates, ruling that the
statute of limitations did not start until the owners first decided to prepay
their mortgages and learned from the government they could not. The owners
had built their projects during or before 1979; the Court’s decision,
however, is also favorable to owners who built their projects through 1989.
Writing for the Court, Justice Ginsburg, stated, “Once the United States
waives its immunity and does business with its citizens, it does so much as a
party never cloaked with immunity.”
“This case was about fundamental considerations of fairness,” Eckland
said. “Many of these owners are small ‘mom & pop’ operators who found
themselves locked into 50-year mortgages with limited financial returns,
despite the fact that they secured the right in their contracts to opt out at
any time. This victory means they will have the opportunity to seek fair
compensation for continuing to own and operate affordable housing.”
“Congress abandoned the owners, the tenants and the agency,” he
continued. “The tenants are stuck in aging housing; the owners are locked in
an investment with minimal return; and the agency has little authority to
build adequate new housing. This case is about the owners’ right to be fairly
compensated, but the victory here may mean better housing for tenants,”
Eckland said.
Section 515 was designed to create rental housing in rural areas through
private development and ownership. A key incentive for owners was the option
to pre-pay their government mortgages at some point and convert their units
to market-rate housing. Without this right to opt out of the program before
their 50-year mortgage terms expired, none of the owners would have
volunteered to participate in the program.
In 1988, however, Congress changed the rules midstream, saying that these
same owners could prepay only under limited conditions. Eckland noted that
the vast majority of owners were not aware of this change in legislation
until they tried to pre-pay and instead found themselves locked into 50-year
mortgages with minimal financial return.
The owners represented by Eckland asked the Court to reverse a lower
court’s decision that the breach of contract and takings claims of “pre-1979”
Section 515 owners was barred by the statute of limitations. The lower court
held that the owners’ claims were barred because they were filed more than
six years after February 8, 1988 — the effective date of the legislation that now
permits Section 515 owners to prepay their government mortgages without
restriction only under limited conditions.
The High Court agreed with Eckland and revised the decision. Justice
Ginsburg wrote for the Court, “Putting prospective plaintiffs [housing
owners] to the choice of either bringing suit soon after the Government’s
repudiation or forever relinquishing their claims would surely proliferate
litigation. Every borrower of FmHA loans, for example, would be forced to sue
the Government within six years of ELIPHA’s enactment in order to preserve a
claim stemming from that Act.”
The Supreme Court’s decision is important to all companies that conduct
business with the federal government. For the first time, the Court has
specified the date of accrual for claims based on legislative changes that
impact the government’s contractual obligations. The opinion states that the
mere enactment of a statute does not amount to a breach of contract that
would trigger the statute of limitations on such a claim. Rather, a breach
occurs, and the claim thus accrues, only when the federal agency who entered
into the contract applies the law in a manner that actually results in a
failure by the government to perform some obligation under the contract.
In addition, the case is the only Supreme Court decision to clearly apply
the doctrine of anticipatory repudiation to legislative acts. The Court held
that the enactment of a law that attempts to modify the government’s own
contractual obligations amounts to only an anticipatory repudiation, i.e., a
statement that it does not intend to perform its future contract obligations.
The Court noted that in response to such a repudiatory statement by the
government, a contractor has the option to either sue at once on the
repudiation, or await the time for performance and then sue if the government
does not perform as promised. Because there always remains the chance that
the government may retract its repudiation by repealing the legislation, the
contractor should not be penalized for waiting to see if the government will
perform when the time comes. Thus, the decision makes clear that contractors
who have been affected by congressional action have the right to elect to
either sue immediately upon the passage of the law or wait until some action
by the contracting agency results in an actual breach of the contract.
The legal team for Franconia Associates is headed by Jeff Eckland, a
partner from Faegre & Benson. With him on the briefs were William Roberts and
Mark Blando. Ten attorneys have been working on the case during the Supreme
Court appeal. Franconia Associates is one of eight affordable
housing cases that Eckland’s firm has filed since 1996.
© 2002 Faegre & Benson, LLP. All rights reserved. Reprinted by permission.
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