ArtI.S10.C1.6.18 Evaluation of the Clause Today

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

It should not be inferred that the Contract Clause is today totally moribund. Even prior to the most recent decisions, it still furnished the basis for some degree of judicial review as to the substantiality of the factual justification of a professed exercise by a state legislature of its police power, and in the case of legislation affecting the remedial rights of creditors, it still affords a solid and palpable barrier against legislative erosion. Nor is this surprising in view of the fact that, as we have seen, such rights were foremost in the minds of the framers of the clause. The Court's attitude toward insolvency laws, redemption laws, exemption laws, appraisement laws and the like, has always been that they may not be given retroactive operation, 1 and the general lesson of these earlier cases is confirmed by the Court's decisions between 1934 and 1945 in certain cases involving state moratorium statutes. In Home Building & Loan Ass'n v. Blaisdell, 2 the leading case, a closely divided Court sustained the Minnesota Moratorium Act of April 18, 1933, which, reciting the existence of a severe financial and economic depression for several years and the frequent occurrence of mortgage foreclosure sales for inadequate prices, and asserting that these conditions had created an economic emergency calling for the exercise of the State's police power, authorized its courts to extend the period for redemption from foreclosure sales for such additional time as they might deem just and equitable, although in no event beyond May 1, 1935.

The act also left the mortgagor in possession during the period of extension, subject to the requirement that he pay a reasonable rental for the property as fixed by the court. Contemporaneously, however, less carefully drawn statutes from Missouri and Arkansas, acts that were not as considerate of creditor's rights, were set aside as violating the Contract Clause. 3 A State is free to regulate the procedure in its courts even with reference to contracts already made, said Justice Cardozo for the Court, and moderate extensions of the time for pleading or for trial will ordinarily fall within the power so reserved. A different situation is presented when extensions are so piled up as to make the remedy a shadow. . . . What controls our judgment at such times is the underlying reality rather than the form or label. The changes of remedy now challenged as invalid are to be viewed in combination, with the cumulative significance that each imparts to all. So viewed they are seen to be an oppressive and unnecessary destruction of nearly all the incidents that give attractiveness and value to collateral security.4 On the other hand, in the most recent of this category of cases, the Court gave its approval to an extension by the State of New York of its moratorium legislation. While recognizing that business conditions had improved, the Court found reason to believe that the sudden termination of the legislation which has dammed up normal liquidation of these mortgages for more than eight years might well result in an emergency more acute than that which the original legislation was intended to alleviate.5

In the meantime, the Court had sustained New York State legislation under which a mortgagee of real property was denied a deficiency judgment in a foreclosure suit where the state court found that the value of the property purchased by the mortgagee at the foreclosure sale was equal to the debt secured by the mortgage. 6 Mortgagees, the Court said, are constitutionally entitled to no more than payment in full. . . . To hold that mortgagees are entitled under the contract clause to retain the advantages of a forced sale would be to dignify into a constitutionally protected property right their chance to get more than the amount of their contracts. . . . The contract clause does not protect such a strategical, procedural advantage.7

While the Contracts Clause remains a part of our written Constitution,8 not every state law affecting preexisting contracts violates the Constitution. 9 Instead, the Court has applied a two-part test to determine whether a law unconstitutionally impairs a contractual obligation. 10 First, the state law must operate as a substantial impairment of a contractual relationship." 11 To determine whether a substantial impairment has occurred, the Court has considered the extent to which the law undermines the contractual bargain, interferes with a party's reasonable expectations, and prevents the party from safeguarding or reinstating his rights. 12 For instance, in Sveen v. Melin, the Court held that a Minnesota law automatically revoking upon a couple's divorce any life insurance policies designating a spouse to be the beneficiary did not substantially impair pre-existing contractual arrangements.13 Specifically, the Sveen Court held as such because the law in question (1) was designed to reflect a policyholder's presumed intent that an ex-spouse not benefit from [the policyholder's] insurance;14 (2) does not upset the beneficiary's expectations, as a divorce court's resolution of the marital assets could have upset the beneficiary designation anyways; 15 and (3) provides a mere default rule that could be reversed with the stroke of the pen.16 In rejecting the Contracts Clause challenge, the Sveen Court viewed the Minnesota law to be in line with other state laws that imposed default rules facilitating the orderly disposition of property interests. 17

Second, if substantial impairment has occurred, the Court then turns to the means and ends of the legislation to determine if it violates the Contracts Clause. 18 Specifically, the Court has asked whether the state law is drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.19 Applying this standard, in two cases in the late 1970s, the Court struck down state legislation that impaired either the government's own contractual obligations or private contracts. 20

In United States Trust, the Court ruled that an impairment would be upheld only if it were necessary and reasonable to serve an important public purpose. But the two terms were given restrictive meanings. Necessity is shown only when the state's objectives could not have been achieved through less dramatic modifications of the contract; reasonableness is a function of the extent to which alteration of the contract was prompted by circumstances unforeseen at the time of its formation. The repeal of the covenant in issue was found to fail both prongs of the test. 21

In Spannaus, the Court drew from its prior cases four standards: did the law deal with a broad generalized economic or social problem, did it operate in an area already subject to state regulation at the time the contractual obligations were entered into, did it effect simply a temporary alteration of the contractual relationship, and did the law operate upon a broad class of affected individuals or concerns. The Court found that the challenged law did not possess any of these attributes and thus struck it down. 22

These cases seemed to embody more active judicial review of economic regulatory activities, in contrast to the deference shown such legislation under the due process and equal protection clauses. Both cases contain language emphasizing the breadth of the police powers of government that may be used to further the public interest and admitting limited judicial scrutiny. Nevertheless, [i]f the Contract Clause is to retain any meaning at all . . . it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power.23

Footnotes

  1.  Jump to essay-1See Edwards v. Kearzey, 96 U.S. 595 (1878); Barnitz v. Beverly, 163 U.S. 118 (1896).
  2.  Jump to essay-2290 U.S. 398 (1934).
  3.  Jump to essay-3W. B. Worthen Co. v. Thomas, 292 U.S. 426 (1934); W. B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935).
  4.  Jump to essay-4295 U.S. at 62.
  5.  Jump to essay-5East New York Bank v. Hahn, 326 U.S. 230, 235 (1945), quoting New York Legislative Document (1942), No. 45, p. 25.
  6.  Jump to essay-6Honeyman v. Jacobs, 306 U.S. 539 (1939). See also Gelfert v. National City Bank, 313 U.S. 221 (1941).
  7.  Jump to essay-7313 U.S. at 233-34.
  8.  Jump to essay-8See United States Tr. Co. v. New Jersey, 431 U.S. 1, 16 (1977).
  9.  Jump to essay-9See El Paso v. Simmons, 379 U.S. 497, 506–07 (1965).
  10.  Jump to essay-10See Sveen v. Melin, 584 U.S. ___, No. 16-1432, slip op. at 7 (2018).
  11.  Jump to essay-11See Allied Structural Steel v. Spannaus, 438 U.S. 234, 244 (1978).
  12.  Jump to essay-12See Sveen, slip op. at 7.
  13.  Jump to essay-13 Id.
  14.  Jump to essay-14Id. at 9.
  15.  Jump to essay-15Id. at 9–10.
  16.  Jump to essay-16Id. at 10.
  17.  Jump to essay-17See id. at 10–12 (equating Minnesota's revocation-on-divorce statute to other laws mandating notifications or filings in order to enforce a contractual right, like state recording statutes that extinguish contractual interests unless timely recorded at government offices). In so concluding, the Court rejected the argument that, unlike state recording statutes, the Minnesota law actually altered the terms of an agreed upon contract. Id. at 13. Specifically, the Sveen Court found there was no meaningful distinction between recording statutes and the Minnesota law, as they all make contract benefits contingent on some simple filing, which is what is dispositive to determine whether there has been a substantial impairment of a contractual obligation. Id. at 13–14.
  18.  Jump to essay-18Id. at 7.
  19.  Jump to essay-19See Energy Reserves Grp. v. Kan. Power & Light Co., 459 U.S. 400, 411 (1983).
  20.  Jump to essay-20See Allied Structural Steel v. Spannaus, 438 U.S. 234, 244 (1978); United States Tr. Co. v. New Jersey, 431 U.S. 1, 16 (1977).
  21.  Jump to essay-21431 U.S. at 25-32 (state could have modified the impairment to achieve its purposes without totally abandoning the covenant, though the Court reserved judgment whether lesser impairments would have been constitutional, id. at 30 n.28, and it had alternate means to achieve its purposes; the need for mass transportation was obvious when covenant was enacted and state could not claim that unforeseen circumstances had arisen.)
  22.  Jump to essay-22438 U.S. at 244-51. See also Exxon Corp. v. Eagerton, 462 U.S. 176 (1983) (emphasizing the first but relying on all but the third of these tests in upholding a prohibition on pass-through of an oil and gas severance tax).
  23.  Jump to essay-23438 U.S. at 242 (emphasis by Court).