Contracts 2d Cited in High-Stakes D.C. Circuit Court Opinion

Contracts 2d Cited in High-Stakes D.C. Circuit Court Opinion

The U.S. Court of Appeals for the District of Columbia Circuit cited the Restatement of the Law Second, Contracts in a recent, notable opinion involving claims arising out of the housing crash of 2007-2008 and subsequent recovery efforts.

In Perry Capital LLC v. Mnuchin, stockholders of Fannie Mae and Freddie Mac filed a putative class action against the FHFA and the Treasury Department, alleging that, by amending the terms of their stock-purchase agreement, the defendants violated the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), and committed common-law torts and breaches of contract. Specifically, the plaintiffs objected to amendments that dramatically increased dividends paid by Fannie Mae and Freddie Mac to the Treasury Department as part of a federal bailout plan.

Affirming in part and reversing in part the district court’s opinion, the Court of Appeals held that, while many of the plaintiffs’ claims were precluded by the Housing and Economic Recovery Act of 2008, their contract-based claims regarding liquidation preferences and dividend rights were not precluded. The court remanded those claims for further review.

When addressing the ripeness of the contract-based claims, the court cited Restatement of the Law Second, Contracts, noting that those claims were “better understood as claims for anticipatory breach,” and stating:

The FHFA (like the district court) says the claims are not prudentially ripe because there can be no breach of any contractual obligation to distribute assets until the Companies are required to perform, namely, upon liquidation. Not so. Under the doctrine of anticipatory breach, ‘a voluntary affirmative act which renders the obligor unable . . . to perform’ is a repudiation, RESTATEMENT (SECOND) OF CONTRACTS § 250(b), that ‘ripens into a breach prior to the time for performance . . . if the promisee elects to treat it as such’ by, for instance, suing for damages . . .; RESTATEMENT (SECOND) OF CONTRACTS §§ 253(1), 256 cmt. c . . . .

Read the full opinion.