For federal grant recipients across diverse sectors ranging from humanitarian assistance to the environment, the disruption of established business practices and the upending of expectations have now become the new normal, as federal agencies announce abrupt shifts in policy and spending. As we have commented previously (here, here, and here), federal agencies now regularly reinterpret terms of contracts and agreements that appeared to have been settled, so that once-stable sources of federal funding change on short notice.

The latest example of this new normal is the dispute over the Gateway Project, a massive undertaking to construct new tunnels under the Hudson River and rehab the existing rail link between New Jersey and New York. On February 6, 2026, in New Jersey v. U.S. Department of Transportation, No. 26-CV-00939 (S.D.N.Y.), the US District Court for the Southern District of New York granted a request for emergency relief made by the states of New Jersey and New York to require the federal government to unfreeze billions of dollars in grant funding for the Gateway Project. After the district court ordered unfreezing the funding, the federal government immediately appealed, arguing that the case belongs at the US Court of Federal Claims. This conflict tees up another case regarding federal financial assistance and where disputes can be litigated. The case also highlights a bigger question: How much control can the executive branch exert over funding that has been appropriated by Congress and put to work in executed agreements with recipients?

Background

The Gateway Project is an effort to improve transit between New Jersey and New York across the Hudson River and is overseen by the Gateway Development Commission (GDC). The GDC entered into grant and loan agreements with the federal government in 2023 to develop, design, and construct the project. With these agreements, the Gateway Project began. Then on September 30, 2025, the federal government abruptly changed course, issuing a letter to GDC stating that it would not provide any further disbursements under the agreements pending a review of race- and sex-based presumptions of social and economic disadvantage from the Department of Transportation’s Disadvantaged Business Enterprise program.

In the intervening months, GDC used its available funding to continue the project and attempted to unfreeze the funds from the federal government. The GDC’s funding expired on February 6, 2026, the same day the states brought suit against the federal government.

The District Court’s Decision and the Government’s Immediate Appeal

The district court granted the states’ request for emergency relief by issuing a temporary restraining order enjoining the federal government’s suspension of disbursement of funding under the four agreements pending decision on a preliminary injunction. In doing so, the district court made two key rulings.

First, the district court held that it had subject matter jurisdiction over the case, rejecting the federal government’s argument that the case should be dismissed as any dispute would have to be heard in the Court of Federal Claims for breach of contract. The district court observed that neither New Jersey nor New York were parties to the agreements, as conceded by the federal government—in contrast to GDC’s being a party—and that the states were challenging the federal government’s decisional process under the Administrative Procedure Act (APA).

Second, the court explained that the federal government failed to defend on any other grounds in the face of the states’ allegations. The court held that without any further defenses, the states would likely succeed on the merits and would be irreparably harmed given the federal government’s actions, and that the balance of equities favored the states. For instance, the court explained that monetary loss of funding could constitute irreparable harm in instances where an entity was forced to shut down, as was the case with GDC, and that the states themselves would suffer such harm.

Underscoring the fast pace of this case, after the district court issued its order in the evening of February 6, 2026, the federal government filed a notice of interlocutory appeal on Superbowl Sunday (February 8) and a request for the district court to stay its ruling pending appeal. In its request, the federal government argued that states should not be allowed to bring APA claims as they were “indirect recipients of grant funding” and that the case belongs in the Court of Federal Claims. At the time of this post, it remains to be seen how the Second Circuit will resolve the appeal.

Impact

Importantly, four days before the New York lawsuit, the GDC filed a breach of contract action against the federal government at the Court of Federal Claims. See GDC v. United States, 26-cv-0017 (Fed. Cl.). This related case and dual-tracked litigation evidences Justice Barrett’s concurrence in NIH v. Am. Pub. Health Ass’n, 145 S. Ct. 2658 (2025), explaining that distinct injuries may arise from an abrupt shift in federal government policy—(1) harm from improvident agency action that can be contested under the APA and (2) a breach of contract, which can be addressed by the Tucker Act.

However the New York Gateway case is resolved, it represents the latest chapter in the tug-of-war over federal funding appropriated by Congress and obligated by agencies but contested by the Trump administration mid-award pursuant to its policy preferences. Also, in light of Justice Barrett’s concurrence, we expect that more disputes will follow the dual-tracked approach of recipients first filing at the Court of Federal Claims for breach of contract and then filing, perhaps with interested parties that have standing (such as New Jersey and New York), an APA action in the local district court. No doubt such a multiplication of litigation will increase costs for recipients and the government.

The upshot is that federal grant recipients should be prepared to address any agency action that impacts their operations under existing agreements and award terms and appreciate that a multipronged litigation strategy may be necessary if there is an existential threat. Given the potential for change where once long-standing programs are upended on short notice and with little explanation, recipients should review their grant portfolios and gauge how exposed they are to risk. Careful attention to agency action and disputes will help recipients manage risk, preserve operational stability, and if necessary, respond appropriately to evolving federal expectations and demands.