Trump Admin Abandons 2nd Circuit Appeal in $16B Gateway Tunnel Case

For counsel tracking the modern impoundment wars, the Gateway dismissal is more than an infrastructure story — it is a retreat by the executive branch in one of its most visible tests of withholding congressionally appropriated funds. The administration's decision to voluntarily dismiss its 2nd Circuit appeal, rather than litigate the merits, leaves in place a ruling that treated the OMB's October 2025 'administrative review' as an unlawful funding freeze. The outcome reinforces the Impoundment Control Act's constraints and offers a blueprint for states challenging federal spending holds.

The Trump administration has dropped its appeal of a federal court ruling that blocked the Department of Transportation from freezing funding for the $16 billion Gateway rail tunnel under the Hudson River, according to a joint filing in the U.S. Court of Appeals for the Second Circuit. The filing, submitted Friday, September 18, 2026, shows New York, New Jersey, and the federal government agreeing to dismiss the appeal of a lower-court decision that barred DOT from withholding money from the project. The dismissal ends, at least for now, a nearly year-long legal confrontation that pitted two states against the executive branch over whether the administration could halt congressionally appropriated infrastructure funds while it conducted an administrative review tied to diversity, equity, and inclusion policies.

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The Trump administration has dropped its appeal of a federal court ruling that blocked the Department of Transportation from freezing funding for the $16 billion Gateway rail tunnel under the Hudson River, according to a joint filing in the U.S.

The conflict began in October 2025, when Office of Management and Budget Director Russell Vought announced that funding for the Hudson Tunnel project was under 'administrative review' to determine whether money was 'flowing based on unconstitutional DEI principles.' The freeze quickly drew lawsuits from New York Attorney General Letitia James and acting New Jersey Attorney General Jennifer Davenport, who argued the withholding was not a good-faith compliance action but political retaliation — a claim the states ultimately prevailed on in the lower court. New Jersey Governor Mikie Sherrill, a Democrat, said the states won in court 'five times' and called the dismissal 'a big victory for millions of New Jersey commuters and for the nearly 100,000 jobs the Gateway Tunnel Project will create.'

The legal significance of the dismissal extends well beyond a single transit project. At its core, the case is one of the highest-profile modern tests of the federal government's authority to withhold — or 'impound' — funds that Congress has already appropriated. The Impoundment Control Act of 1974, enacted after the Nixon administration withheld billions in domestic spending, generally requires the president to seek congressional approval before rescinding appropriated money. The Supreme Court reinforced those limits in Train v. City of New York in 1975, holding that the president cannot unilaterally refuse to spend funds where Congress has mandated their expenditure. The Gateway dispute replayed those arguments in the context of a policy-driven hold dressed up as a compliance review, and the administration's decision to abandon its appeal rather than press the merits suggests it saw little prospect of reversing the lower court's analysis.

That retreat is notable because it came less than a month after the Department of Justice signaled it intended to pursue the appeal. The abrupt reversal — from indicating an appeal in late August 2026 to agreeing to dismiss on September 18 — may reflect a strategic recalculation by federal litigators. A voluntary dismissal avoids an adverse Second Circuit precedent that could have ripple effects across the administration's broader campaign to freeze or rescind spending on policy grounds. The administration has faced a cascade of lawsuits challenging similar funding freezes across multiple infrastructure, energy, and social programs, and an appellate ruling endorsing the states' impoundment argument here would have supplied a powerful citable decision for plaintiffs elsewhere. By dismissing, the government preserves its ability to litigate the underlying doctrine in other circuits or on different facts.

For New York and New Jersey, the practical stakes are enormous. The Gateway program is described by state officials as the nation's most urgent infrastructure project, designed to replace and expand the century-old rail crossings beneath the Hudson River that carry Amtrak and New Jersey Transit trains. The $16 billion price tag encompasses new tunnels and related improvements, and the project's advocates have long argued that a failure of the existing tunnels would cripple the regional economy. Governor Sherrill's figure of nearly 100,000 jobs underscores the employment and economic-development dimensions that made the funding freeze politically explosive in both states, drawing bipartisan criticism from elected officials who framed the hold as a threat to thousands of good-paying jobs.