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Contract —Anticipatory Repudiation and the Running of the Statute of Limitations—Franconia Associates v. United States, 536 U.S. 129 (2002)

The anticipatory repudiation of a occurs when a promisor withdraws from an obligation prior to the agreed upon performance time.1 In the event of an anticipatory repudiation, the statutory period of limitations does not begin until the fixed day of contractual performance or upon the promisee’s acknowledgment of the repudiation date as the time of the contract breach.2 In Franconia Associates v. United States,3 the United States Supreme Court considered whether the United States Government’s (Government) subsequent addition of restrictions on loan agreements was either an immediate by the Government, or a repudiation of the Government’s initial contractual obligation.4 The Court concluded that the Government’s added restrictions repudiated the contract, thus moving the date of breach to the time fixed for performance, and therefore, within the statute of limitations’ timeframe.5 Prior to 1979, through the National Housing Act of 1949 (1949 Act), Congress established a program where borrowers could receive low-interest loans from the Government, as long as they limited the use of their properties according to the conditions stipulated under the 1949 Act.6 Under these loan agreements, the Government permitted borrowers to prepay their loans at any time without penalty and, upon prepayment, the borrowers could then rent their properties at the prevailing market rate.7 With no prepayment deterrence

1. Kinsey v. United States, 852 F.2d 556, 558 (Fed. Cir. 1988) (defining anticipatory repudiation). The court noted that an anticipatory repudiation occurs when “an obligor communicates to an obligee that the obligor will commit a breach in the future.” Id.; see ARTHUR L. CORBIN, CORBIN ON § 959 (2001) (commenting on contractual theory of anticipatory repudiation). A repudiation is an “anticipatory breach of contract by a promisor” made “by word or by act.” CORBIN, supra, § 959. 2. Roehm v. Horst, 178 U.S. 1, 13 (1900) (noting repudiation allows promise to acknowledge breach at fixed performance date or renunciation time); see 1 CALVIN W. CORMAN, LIMITATION OF ACTIONS § 7.2.1 (1991) (stating promisee’s actions determine start of statute of limitations). The statute of limitations will start prior to the performance date if the promisee charges the repudiator for breach prior to such date. CORMAN, supra, § 7.2.1. If the promisee elects to postpone filing charges until the fixed performance date, however, the statute of limitations will not commence until that date. Id.; see also CORBIN, supra note 1, § 989 (noting statute of limitations may initiate at different times depending on promisee’s action towards repudiation). 3. 536 U.S. 129 (2002). 4. Id. at 146-47 (addressing whether government’s contract amendment constituted repudiation or immediate breach). 5. Id. at 146-47, 150 (recognizing government restriction amounted to repudiation thereby moving breach date within statute of limitations period). 6. Id. at 141 (identifying provisions of loan agreements). The loan agreements under the 1949 Housing Act placed restrictions on the eligibility of tenants, as well as on the amount of rent that could be charged. Id. 7. Franconia Assocs. v. United States, 240 F.3d 1358, 1359-60 (Fed. Cir. 2001) (describing terms and amendments of loan agreements), rev’d, 536 U.S. 129 (2002). The promissory note, included in the contract MAHONEYMACROFINAL.DOC 6/19/2004 8:52 PM

1236 SUFFOLK UNIVERSITY LAW REVIEW [Vol. XXXVII:1235 implemented under the original loan agreements, the amount of affordable housing began to diminish, spurring Congress to pass legislation in 1979 prohibiting prepayment of loans made under the 1949 Act unless borrowers met certain conditions.8 Over the next decade, Congress amended and re- amended the retroactive nature of the 1979 legislation, culminating with the passage of the Emergency Low Income Housing Preservation Act of 1987 (ELIPHA), which provided for a permanent restriction on the prepayment of loans entered into prior to 1979.9 Congress further amended ELIPHA to restrict prepayment on all loans that borrowers entered into prior to 1989 with the passage of the Housing and Community Development Act of 1992 (1992 Act).10 Pre-1979 and post-1979 borrowers of these government loans joined complaints and asserted that the Government’s 1992 amendment of ELIPHA constituted an anticipatory repudiation of the loan contracts.11 The Government filed a motion to dismiss stating that the breach of the pre-1979 borrowers’ contracts occurred with the first ELIPHA enactment in 1988, and therefore the statute of limitations barred the pre-1979 borrowers’ claims.12

between the borrower and the government, allowed the borrower to prepay the loan at any time without penalty and did not impose any restrictions on property use once the loan was paid in full. Id.; see National Housing Act of 1949, Pub. L. No. 87-723, § 4(b), 76 Stat. 671 (1962) (listing loan conditions and lack of prepayment penalty). 8. See Franconia Assocs. v. United States, 240 F.3d 1358, 1359-60 (Fed. Cir. 2001) (stating facts of case), rev’d, 536 U.S. 129 (2002); see also Housing and Community Development Amendments of 1979, Pub. L. No. 96-153, § 503, 93 Stat. 1134 (1979). The amendments applied retroactively, preventing borrowers, both prior to and after the amendments’ enactment, from prepaying loans unless borrowers ensured the low-income status of the properties for a fifteen year period from the original date of their loans. Housing and Community Development Amendments of 1979 § 503. Under the amended legislation, the Government retained the ability to waive the prepayment restriction if there was an adequate supply of low-income housing in a loan recipient’s area. Id. 9. Franconia Assocs. v. United States, 240 F.3d 1358, 1360-61 (Fed. Cir. 2001) (highlighting effect on loan prepayment through ELIPHA’s passage), rev’d, 536 U.S. 129 (2002); see also Emergency Low Income Housing Preservation Act of 1987, Pub. L. No. 100-242, § 241, 101 Stat. 1885, 1886 (1988) (restricting further pre-1979 borrowers’ prepayment ability); Housing and Community Development Act of 1980, Pub. L. No. 96- 399, § 514, 94 Stat. 1670, 1671 (1980) (stipulating pre-1979 borrowers now allowed to prepay loans at any time). The 1987 legislation related to any loan originated prior to December 21, 1979. Emergency Low Income Housing Preservation Act of 1987 § 241(4)(a). The Government must attempt to convince borrowers to “make a binding commitment to extend the low income use of the assisted housing . . . for not less than [a] 20-year period,” prior to accepting prepayment. Id. § 241(4)(a). The borrower must offer to sell the property to “any qualified nonprofit organization or public agency at a fair market value” if the Government and borrower are unable to agree to extend the loan’s term. Id. § 241(5)(a)(i). After 180 days, the Government could “accept the offer to prepay” if no one makes an offer. Id. § 241(5)(a)(ii). 10. Franconia Assocs. v. United States, 43 Fed. Cl. 702, 705 (1999) (describing 1992 Act’s effect on ELIPHA), aff’d, 240 F.3d 1358 (Fed. Cir. 2001), rev’d, 536 U.S. 129 (2002); see also Housing and Community Development Act of 1992, Pub. L. No. 102-550, § 712, 106 Stat. 3681, 3841 (1992) (applying ELIPHA’s prepayment restrictions from pre-1979 loans to all pre-1989 loans). 11. 536 U.S. at 143 (describing complaint presented). The borrowers argued that the Government’s repudiation gave the borrowers the right to utilize their prepayment option, thereby allowing the borrowers to cease participating in the Government’s housing program. Id. 12. Franconia Assocs. v. United States, 43 Fed. Cl. 702, 705 (1999) (outlining Government’s motion), MAHONEYMACROFINAL.DOC 6/19/2004 8:52 PM

2004] CASE COMMENT 1237

The Court of Federal Claims granted the Government’s motion to dismiss the pre-1979 borrowers’ claims, ruling that the 1988 legislation was an actual breach of the parties’ contracts that immediately initiated the running of the statute of limitations.13 The Court of Appeals for the Federal Circuit affirmed the decision.14 The United States Supreme Court granted certiorari and reversed the appellate court’s decision, concluding that ELIPHA’s enactment constituted a repudiation of the Government loans, rather than an immediate breach, thus shifting the breach date sufficient to bring the borrowers’ claim within the statutory time period.15 A contract is an enforceable obligation that arises from an agreement between two or more parties to perform, or to refrain from performing, a certain act.16 A promise serves as a contract’s foundation when it is an enforceable proposition that affords the promisee a legal remedy against a promisor if the promisor fails to live up to the terms of the agreement.17 A aff’d, 240 F.3d 1358 (Fed. Cir. 2001), rev’d, 536 U.S. 129 (2002). The pre-1979 borrowers’ filed their complaint on May 30, 1997, and the ELIPHA enactment that restricted pre-1979 loans was filed in 1988. Id. The Government claimed the enactment of ELIPHA affecting pre-1979 loans breached those contracts at the time of ELIPHA’s 1988 enactment and consequently triggered the statute of limitations. Id.; see 28 U.S.C. § 2501 (2003) (describing statute’s timeline for filing valid claims). The statute provides in relevant part: “Every claim of which the United States Court of Federal Claims has jurisdiction shall be barred unless the petition . . . is filed within six years after such claim first accrues.” 28 U.S.C. § 2501. 13. Franconia Assocs. v. United States, 43 Fed. Cl. 702, 705, 709, 715 (1999) (granting Government’s motion to dismiss pre-1979 borrowers’ action), aff’d, 240 F.3d 1358 (Fed. Cir. 2001), rev’d, 536 U.S. 129 (2002). The court concluded that the Government’s 1988 enactment of ELIPHA was an actual breach of contract, rather than an anticipatory repudiation of the loan contracts. Id. at 708, 711. The court held, therefore, that because the borrowers’ time to file a complaint began in 1988, the complaint was not filed within the required statutory time period. Id. at 706, 709. 14. Franconia Assocs. v. United States, 240 F.3d 1358, 1360 (Fed. Cir. 2001), rev’d, 536 U.S. 129 (2002). The court of appeals held that the Government had a duty under the pre-1979 contracts to give the borrowers the “right to prepay their loans at any time.” Id. at 1363. The court determined that the Government’s 1988 enactment of ELIPHA was an immediate breach of the contract because the pre-1979 borrowers had an “unfettered prepayment right” that ELIPHA destroyed. Id. at 1363-64. The court of appeals held that ELIPHA’s enactment in 1988 initiated the running of the statute of limitations, reasoning that the Government’s action did not communicate to the borrowers that it would commit a breach in the future, which is what gives rise to an anticipatory repudiation. Id. at 1363-64. The court held, therefore, that the trial court properly dismissed the 1997 claim because the six-year statute of limitations had run. Id. at 1366. 15. 536 U.S. at 146-47, 150 (noting Government precluding prepayment constituted repudiation because Government had “obligation to accept prepayment”). The Court determined the enactment of ELIPHA repudiated the loans and that repudiation moved the date of breach within the six year statutory filing period. Id. 16. Schaefer v. Williams, 19 Cal. Rptr. 2d 212, 213-14 (Ct. App. 1993) (identifying contract qualities); RESTATEMENT (SECOND) OF CONTRACTS § 1 (1981) [hereinafter 2D RESTATEMENT]. The Restatement (Second) denotes a contract as “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” 2D RESTATEMENT, supra, § 1. 17. Montgomery County Hosp. Dist. v. Brown, 965 S.W.2d 501, 502 (Tex. 1998) (noting acceptance of promise forms contract); see 2D RESTATEMENT, supra note 16, § 2 (defining promise). A promise is a “manifestation of intention to act or refrain from acting in a specified way,” which causes the promisee to believe that “a commitment has been made.” 2D RESTATEMENT, supra note 16, § 2(1). A promisee may view a promise as an enforceable commitment when the promisor conveys an “external expression of intention” to perform in a certain manner. Id. § 2 cmt. b. Contra id. § 2 cmt. a (noting certain promises not of legal effect MAHONEYMACROFINAL.DOC 6/19/2004 8:52 PM

1238 SUFFOLK UNIVERSITY LAW REVIEW [Vol. XXXVII:1235 party’s non-performance, or failure to fully perform as promised, results in a breach of contract and entitles the injured party to damages.18 At , an injured party could bring an action for breach of contract prior to the contract’s scheduled performance date.19 Over time, American courts slowly began to accept this theory that anticipatory repudiation could take place prior to the date of performance.20 Having gained judicial acknowledgment by the courts, the doctrine received further validation through its standardization in the Restatements and the .21 When a breach occurs, the statute of limitations for filing a claim begins to run at the time of breach.22 When a claim arises from anticipatory repudiation, and do not result in contract formation). 18. See Cary Oil Co. v. MG Ref. & Mktg., Inc., 90 F. Supp. 2d 401, 408 (S.D.N.Y. 2000) (proffering every contract breach leads to damage claim); 2D RESTATEMENT, supra note 16, § 235(2) (showing contractual nonperformance results in breach). When a contract binds a promisor to perform, the promisor’s nonperformance results in a breach of the contract. 2D RESTATEMENT, supra note 16, §§ 235(2), 236 (illustrating full and partial contract breaches result in different damage claims). A complete breach of a promisor’s contractual obligation gives the injured party a damage claim to “all of the injured party’s remaining rights to performance.” Id. § 236(1). A promisor’s partial breach entitles the injured party to “damages based . . . only [on] . . . the injured party’s remaining rights to performance.” Id. § 236(2). 19. Hochster v. De la Tour, 118 Eng. Rep. 922 (Q.B. 1853) (holding party injured by anticipatory breach entitled to bring immediate action). In Hochster, the promisee contracted with the promisor for an employment contract that was to begin two months in the future. Id. at 922. Prior to the start date, the promisor informed the promisee that he would not need his services. Id. at 923. The promisee sued the promisor on the theory that the promisor had breached the contract prior to the date of performance. Id. The court ruled for the promisee, noting that “after renunciation of the agreement by the [promisor], the [promisee] should be at liberty to consider himself absolved from any future performance . . . [and has the] . . . right to sue for any damage . . . suffered from the breach.” Id. at 926. With respect to the promisor’s argument that the victim of an anticipatory breach should not be allowed to bring suit until performance was due, the court noted that “it seems reasonable to allow an option to the injured party, either to sue immediately, or to wait till the time when the act was to be done.” Id. at 927. 20. Roehm v. Horst, 178 U.S. 1, 8, 13 (1900) (acknowledging legitimacy and acceptance of anticipatory repudiation theory). In Roehm, the Court noted that the anticipatory repudiation theory had “become the settled law of England” when a promisor makes his intention to breach known prior to the performance date. Id. at 8. The Court also signaled the growing importance of the anticipatory repudiation doctrine in the United States by noting that the doctrine “has been . . . almost universally accepted by the courts of this country.” Id. at 13; see Howard v. Daly, 61 N.Y. 362, 374 (1875) (stating person repudiating service contract before performance date subject to injured party’s immediate action). Contra Keith A. Rowley, A Brief History of Anticipatory Repudiation in American Contract Law, 69 U. CIN. L. REV. 565, 601-04 (2001) (illustrating early twentieth- century scholarly criticism of anticipatory repudiation doctrine). While the article indicated strong scholarly support for the doctrine, Rowley noted that some scholars criticized the injured parties’ ability to bring an immediate action for a “performance not yet due.” Id. at 603. 21. See 2D RESTATEMENT, supra note 16, § 250 (formerly RESTATEMENT OF CONTRACTS § 318 (1932)) (defining repudiation and noting damage claims warranted when acts cause injury); U.C.C. § 2-610 (1977) (codifying repudiation and detailing available remedies when promisor repudiates before performance date); see also Rowley, supra note 20, at 608-12, 616-19, 625-28 (detailing history and subsequent effects of repudiation codification in Restatements and Uniform Commercial Code). 22. Brighton Vill. Assocs. v. United States, 52 F.3d 1056, 1060 (Fed. Cir. 1995) (stating when statute of limitations commences). In Brighton, the court noted the contract dispute claim at issue originated on the date of the contract breach. Id.; see CORMAN, supra note 2, § 7.2.1 (stating statute of limitations begins to run when breach occurs). MAHONEYMACROFINAL.DOC 6/19/2004 8:52 PM

2004] CASE COMMENT 1239 the Court recognizes that the statute of limitations will not start prior to the fixed performance date, unless the injured party chooses to treat the repudiation as the actual breach.23 When the United States Government contracts with individuals, it is subject to the same contract and standards that govern its citizens.24 In Franconia Associates v. United States, the Court considered whether, for statute of limitations purposes, the Government’s addition of a prepayment penalty into loan agreements constituted an immediate breach or a repudiation of the Government’s contractual obligation.25 The Court acknowledged that a promisor’s failure to perform at the fixed performance time results in an instantaneous breach.26 Moreover, the Court noted that an anticipatory repudiation occurs when a promisor announces a prior intention not to perform at the agreed upon performance time.27 The Court further noted that if an anticipatory repudiation occurs, a promisee may acknowledge the breach at that time or may wait until performance is due.28 The Court indicated that with anticipatory repudiation, the running of the statute of limitations begins when the promisee acknowledges the breach.29 The Court reasoned that because the Government had an obligation to accept prepayment under the original loan agreements, the Government’s relinquishment of this right, with the passage of ELIPHA, served as prior notice to the borrowers that the Government would not perform as promised.30 Viewing ELIPHA’s passage as a repudiation, the Court permitted the

23. Roehm v. Horst, 178 U.S. 1, 13 (1900) (allowing breach recognition either when repudiation occurs or at performance date); see CORMAN, supra note 2, § 7.2.1, at 488 (outlining interrelation of anticipatory repudiation and statute of limitations). With anticipatory repudiation, the initiation of the statute of limitations depends on whether the injured party decides to treat the repudiation as a present breach, or whether they await the contract performance date to recognize the breach. CORMAN, supra note 2, § 7.2.1, at 488. If the injured party awaits the promisor’s scheduled performance date, then the statute of limitations commences at the scheduled performance time rather than at the earlier repudiation date. Id. 24. See Mobil Oil Exploration & Producing S.E., Inc. v. United States, 530 U.S. 604, 607 (2000) (describing United States’ contract liability). 25. 536 U.S. at 140-41 (stating relation of loan agreement to statute of limitations). 26. Id. at 146 (articulating failure to perform constitutes immediate breach of contract). 27. Id. (recognizing anticipatory repudiation when promisor conveys intention to breach). The Court declared that repudiation occurs when a promisor’s “voluntary affirmative act” gives the promisee notice of the promisor’s breach. Id. 28. 536 U.S. at 140-41 (explaining promisee’s options concerning promisor’s anticipatory repudiation); see Roehm v. Horst, 178 U.S. 1, 13 (1900) (commenting on promisee’s rights under anticipatory repudiation). 29. 536 U.S. at 147 (detailing anticipatory repudiation’s effect on statute of limitations); see CORMAN, supra note 2, § 7.2.1, at 488. The statute of limitations begins at the time of breach if “the injured party chooses to treat the . . . repudiation as a present breach.” CORMAN, supra note 2, § 7.2.1, at 488. If the victim waits until the performance date, however, “the statute of limitations commences to run, from the time fixed for performance rather than from the earlier date of repudiation.” Id. 30. 536 U.S. at 146-47 (indicating Government has obligation to accept prepayment). The original loan agreements allowed the borrowers to prepay at any point during the loan contract. Id. at 138. Thus, the Court stated that the Government was required to accept prepayment for the corresponding period of time. Id. at 146. Therefore, when the Government implemented ELIPHA, which added a prepayment penalty to all pre-1979 contracts, it notified borrowers of its intention not to perform as represented in the promissory notes. Id. MAHONEYMACROFINAL.DOC 6/19/2004 8:52 PM

1240 SUFFOLK UNIVERSITY LAW REVIEW [Vol. XXXVII:1235 borrowers to acknowledge the breach at performance time.31 The Court concluded that the borrowers’ breach of contract claims were validly filed within the requisite six-year statutory filing period because the Government’s repudiation moved the breach to the time fixed for performance.32 Additionally, the Court would not afford the Government the benefit of an earlier statute of limitations accrual date for contractual claims filed against it.33 In reversing the appellate court’s holding, the Court correctly classified ELIPHA as a repudiation of the loan contracts, rather than as an immediate breach.34 Therefore, the Court properly applied established contractual principles to conclude that the borrowers, as the victims of repudiation, could determine when to recognize a breach.35 The Court accurately noted that the statute of limitations would commence at either the date of performance or upon the borrowers’ recognition of the repudiation as an immediate breach.36 Furthermore, the Court followed established precedent that subjects the Government to the same contractual principles as individuals.37 The Court clarified the loan statute’s language by analyzing the relationship between anticipatory repudiation and the statute of limitations.38 It emphasized that in repudiation claims, the contractual principles that apply to individuals will equally apply to the Government.39 The Court’s characterization of ELIPHA as a repudiation of the loan contracts helps avert confusion for individuals potentially seeking contract breach claims against the Government.40 The anticipatory repudiation doctrine

31. Id. at 140, 147 (explaining borrowers’ claim options). The borrowers could treat ELIPHA “as a present breach by filing suit prior to the date indicated for performance” or “breach would [otherwise] occur when a borrower attempted to prepay” their loan. Id. at 147. 32. Supra notes 5, 15 and accompanying text (explaining Court’s reasoning). 33. 536 U.S. at 147-49 (refuting Government’s claim concerning § 2501 providing different accrual date in repudiation claims). The Government argued that the design of § 2501 envisioned claims being filed against the Government at the “earliest possible date.” Id. at 147. The Court, however, noted that if repudiation claims had to be filed at the “earliest possible date,” then ELIPHA’s enactment would result in “[e]very borrower . . . be[ing] forced to sue the Government within six years of ELIPHA’s enactment.” Id. Interpreting § 2501 as the Government proposed would thus lead to a proliferation of lawsuits. Id. at 149. Therefore, classifying ELIPHA as an immediate breach of the loan agreements forces borrowers to choose between bringing suit “soon after the Government’s [breach] or forever relinquishing their claims.” Id. 34. Supra notes 4, 5 and 15 and accompanying text (discussing Court’s view of ELIPHA as repudiation of loan agreements). 35. Supra notes 2, 23 and accompanying text (analyzing injured promisee’s ability to recognize breach at different points under repudiation theory). 36. Supra notes 5, 15, 23 and accompanying text (recognizing repudiation results in different commencement of statute of limitations). 37. See supra note 24 and accompanying text (holding Government to same principles as individuals when Government contracts with private citizens). 38. See supra note 33 and accompanying text (noting Government’s claim concerning § 2501). 39. See supra note 33 and accompanying text (analyzing and refuting Government’s claim that § 2501 provides for different accrual date in repudiation claims); see also supra note 24 and accompanying text (holding Government to same standards as individuals when Government and citizens contract). 40. See supra note 33 and accompanying text (noting classification as repudiation allows individuals to sue Government at time of breach or performance). MAHONEYMACROFINAL.DOC 6/19/2004 8:52 PM

2004] CASE COMMENT 1241 potentially diminishes unnecessary litigation in future contracts disrupted by such action.41 The Court’s decision rightfully continues the role of anticipatory repudiation in contract cases within federal jurisdictions.42 In Franconia Associates v. United States, the Court considered whether restrictions subsequently added to contracts between the Government and individuals were either an immediate breach or a repudiation of the Government’s contractual responsibilities. The Court correctly characterized the added restrictions as a repudiation, thus moving the time of breach to the date of performance, and within the statue of limitations filing period. The Court’s unanimous decision clarifies anticipatory repudiation’s role in similar contracts between the Government and its citizens, and thereby clearly establishes the timeframe in which citizens may file contract breach claims against the Government.

Brian B. Mahoney, Jr.

41. See supra note 33 and accompanying text (stating ELIPHA’s classification as repudiation will prohibit proliferation of lawsuits upon ELIPHA’s enactment). 42. 536 U.S. at 140-41, 146-47, 150 (supporting use of anticipatory repudiation doctrine in analysis and ordering remand).