A. Creation of National Gov’t and Separation of Power 7

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Contracts Clause

Introduction
1. Article I, Sec. 10 of the constitution provides that “no state shall pass any law impairing the obligation of contracts.”
2. Applies only if state or local law interferes with existing contracts – does not apply to fed gov’ts; challenges to fed interference have to be brought under due process clause where they will receive deferential rationality review.
3. Contract clause does not limit gov’t ability to regulate terms of future contracts, applies only if state or local gov’t is interfering w/ perf of already existing contracts.
History
1. Framers
  1. Motivated by desire to prevent states from adopting laws to help debtors at the expense of creditors.
  2. Framers were concerned that in times of depression, state legislatures might adopt laws to protect debtors who were unable to pay what was owed.
  3. Meant to stop debtor relief legislation that interfered with contractual rights – also to encourage credit by assuring lenders that they would be repaid.
2. Progressively used less over time
  1. First half of 19^th century - Used aggressively to invalidate state and local laws that interfered with rights under existing contracts
  2. Early 20^th century – rarely mentioned in court decisions.
  3. 1897 – 1937 (Lochner era) – contracts clause made superfluous by Court’s protection of freedom of contract under due process clauses of 5^th and 14^th amendments. Contracts clause more limited b/c it applied only to existing contracts, while due process could be used to invalidate future contracts.
3. Modern
  1. 1934 – Blaisdell – court upheld debtor relief legislation under emergency basis.
  2. 1937 – Court’s deference to gov’t economic reg has resulted in contracts clause being rarely used.
  3. Only twice since 1937 has court found laws to violate contracts clause – only if there is a “substantial impairment” of the contract and only if the law fails to reasonable serve a “significant and legitimate public purpose.”
  4. Gov’t impairment of gov’t contracts will receive greater scrutiny than interference w/ private contracts b/c of distrust of gov’t when it is acting in its own self-interest.
4. Questions
  1. How aggressively should the Court protect contract rights?
  2. How much should the Court defer to the legislature, even when contractual rights are impaired?
Fletcher v. Peck (1810)
1. SC declared GA statute unconstit.
2. Law revoking contracts that had sold land violated contracts clause and infringed natural law principles.
3. Even though legis. that enacted first legis. was corrupt, repealing the legis. and destroying vested rights and interfering with contracts (private contracts between later parties who bought the land) couldn’t be done.
4. What about legislation done in public good? No good if it invalidates contracts...
Sturges v. Saunders (1819)
1. NY bankruptcy law couldn’t operate retroactively to discharge debt incurred before law was enacted.
NJ v. Wilson (1813)
1. Declared unconstit. state law that repealed a tax exemption that colonial legis. had granted to land 50 years earlier.
2. Repealing law violated contracts clause.
Dartmouth College v. Woodward – difference between prospective and retrospective legislation (1819)
1. Marshall - Legislative grants to the college might have explicitly reserved the right to the state to amend the charter and this application of contracts clause probably wasn’t what founders meant.
2. Declared unconstit. NH law that changed charter issued to Dartmouth College – made it a private instit. and NH attempted to change this to public instit.
Ogden v. Saunders (1827)
1. Court limited Sturges to retroactive application of bankruptcy laws to preexisting contracts.
2. Statute in existence at the time the contract is made becomes part of the contract.
3. Marshall’s dissent:
  1. Gov’t could not dictate in advance terms of private contracts in order to release obligors in the event of their insolvency.
  2. Origin of freedom of contract is natural right – intrinsic and prior to gov’t.
  3. Society can only control formalities of contract formation or prhobit specific contracts as violatiosn of public policy. States can also pass law affecting contract remedies.
  4. Thought that the reserve clauses turned obligatory contracts into de facto conditional promises.
  5. Applying the clause to only preexisting contracts would render it useless, and he thought this the most important clause.
Reserve clauses for incorporation charters were not contested
1. Incorporation was thought of as a privilege rather than as a grant of property
2. So reserve clauses possibility invalidating grants of incorporation or changing them were not thought to infringe on contracts clauses.
Blaisdell (1934) – Strongest indication that framers’ intent should not be controlling; contracts clause cannot automatically trump state interests
1. Statute at issue
  1. Allows MN courts to lengthen times that property owners would have to cure defaults and stave off repos of their houses so long as payment were made to cover the monthly carrying costs.
  2. Many loans at this period had a balloon payment at the end of the mortgage, so many foreclosures happened b/c of this. But doesn’t the contract clause conflict with the power of states to do this.
2. Holding
  1. Cannot use contract clause to automatically trump state interests in general public welfare.
    1. What does this suggest about how the court will exercise its power to decide constitutionality in other gov’t actions?
  2. Gov’t can interfere with existing contracts if it has a valid police purpose, and it describes police power broadly enough to include debtor relief, protecting people from foreclosure of their mortgages
3. Dissent
  1. Contracts clause was put in specifically to limit states’ power to interfere with contracts during times of economic problems.
  2. We have the clearest possible evidence of the meaning of this clause since it emerged out of very distinct economic circumstances and that those circumstances were predicted and were very similar to the ones at issue here.
4. Ruling
  1. Hughes Manages to pull this off by saying that there has always been the notion that while the state can’t impair the obligations of contracts merely to benefit some people while hurting others (naked redistributive purposes), it can impair the obligations when doing so is in the general public interest.
    1. Precedent - Property rights case in 1922 dealing with landlord tenant law.
    2. Framers’ view was not an absolute one, but one that had to be balanced with the general public interest.
  2. Rejection of originalism
    1. He rejects originalism, and instead says that there has been a growing recognition of public needs that has grown as the country has grown, and we do not have to stick to the social understandings that the framers had, b/c in words of Marshall in McCulloh, this is a constitution we’re interpreting.
    2. Constitution has to grow with the country, and this has always been the case.
    3. You have to look at the change in times and you can’t be bound entirely by what framers were thinking.
    4. There is a far greater understanding now of the ways in which private contracts can affect the public interest.
    5. Need to find a balance between public welfare and individual common law rights.
5. Reasoning established in Blaisdell – applicable to later economic rights cases in determining valid legis. purpose
  1. Is the occasion proper for the exercise of police power – are vital interests of the public at stake?
    1. Yes, the emergency is the threat of loss of homes and lands which furnish necessary shelter and means of subsitence.
  2. Was the legislation addressed to a legitimate end – not for the mere advantage of particular individuals but for the protection of basic interest of society?
    1. Was targeted towards protection of society – helps mortgagors and mortgagees alike in general, since mortgagors would not benefit by widespread foreclosure, since then they would lose a lot of money through the decline in property values and the inability to sell the property.
  3. Is the relief provided of a character appropriate to that emergency so that it does not contravene the constitutional contract provision and 5^th amendment due process?
    1. Extending grace period is tailored to emergency.
  4. Is it granted upon reasonable conditions?
    1. Conditions upon which grace period is extended are not unreasonable.
    2. Helps both mortgagors and mortgagees
  5. Is it temporary in operation and limited to exigency which caused it to arise?

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A. Creation of National Gov’t and Separation of Power 7

Contracts Clause

Introduction

Article I, Sec. 10 of the constitution provides that “no state shall pass any law impairing the obligation of contracts.”

Applies only if state or local law interferes with existing contracts – does not apply to fed gov’ts; challenges to fed interference have to be brought under due process clause where they will receive deferential rationality review.

Contract clause does not limit gov’t ability to regulate terms of future contracts, applies only if state or local gov’t is interfering w/ perf of already existing contracts.

History

Framers

Motivated by desire to prevent states from adopting laws to help debtors at the expense of creditors.

Framers were concerned that in times of depression, state legislatures might adopt laws to protect debtors who were unable to pay what was owed.

Meant to stop debtor relief legislation that interfered with contractual rights – also to encourage credit by assuring lenders that they would be repaid.

Progressively used less over time

First half of 19th century - Used aggressively to invalidate state and local laws that interfered with rights under existing contracts

Early 20th century – rarely mentioned in court decisions.

Modern

1934 – Blaisdell – court upheld debtor relief legislation under emergency basis.

1937 – Court’s deference to gov’t economic reg has resulted in contracts clause being rarely used.

Only twice since 1937 has court found laws to violate contracts clause – only if there is a “substantial impairment” of the contract and only if the law fails to reasonable serve a “significant and legitimate public purpose.”

Gov’t impairment of gov’t contracts will receive greater scrutiny than interference w/ private contracts b/c of distrust of gov’t when it is acting in its own self-interest.

Questions

How aggressively should the Court protect contract rights?

How much should the Court defer to the legislature, even when contractual rights are impaired?

Fletcher v. Peck (1810)

SC declared GA statute unconstit.

Law revoking contracts that had sold land violated contracts clause and infringed natural law principles.

Even though legis. that enacted first legis. was corrupt, repealing the legis. and destroying vested rights and interfering with contracts (private contracts between later parties who bought the land) couldn’t be done.

What about legislation done in public good? No good if it invalidates contracts...

Sturges v. Saunders (1819)

NY bankruptcy law couldn’t operate retroactively to discharge debt incurred before law was enacted.

NJ v. Wilson (1813)

Declared unconstit. state law that repealed a tax exemption that colonial legis. had granted to land 50 years earlier.

Repealing law violated contracts clause.

Dartmouth College v. Woodward – difference between prospective and retrospective legislation (1819)

Marshall - Legislative grants to the college might have explicitly reserved the right to the state to amend the charter and this application of contracts clause probably wasn’t what founders meant.

Declared unconstit. NH law that changed charter issued to Dartmouth College – made it a private instit. and NH attempted to change this to public instit.

Ogden v. Saunders (1827)

Court limited Sturges to retroactive application of bankruptcy laws to preexisting contracts.

Statute in existence at the time the contract is made becomes part of the contract.

Marshall’s dissent:

Gov’t could not dictate in advance terms of private contracts in order to release obligors in the event of their insolvency.

Origin of freedom of contract is natural right – intrinsic and prior to gov’t.

Society can only control formalities of contract formation or prhobit specific contracts as violatiosn of public policy. States can also pass law affecting contract remedies.

Thought that the reserve clauses turned obligatory contracts into de facto conditional promises.

Applying the clause to only preexisting contracts would render it useless, and he thought this the most important clause.

Reserve clauses for incorporation charters were not contested

Incorporation was thought of as a privilege rather than as a grant of property

So reserve clauses possibility invalidating grants of incorporation or changing them were not thought to infringe on contracts clauses.

Blaisdell (1934) – Strongest indication that framers’ intent should not be controlling; contracts clause cannot automatically trump state interests

Statute at issue

Allows MN courts to lengthen times that property owners would have to cure defaults and stave off repos of their houses so long as payment were made to cover the monthly carrying costs.

Many loans at this period had a balloon payment at the end of the mortgage, so many foreclosures happened b/c of this. But doesn’t the contract clause conflict with the power of states to do this.

Holding

Cannot use contract clause to automatically trump state interests in general public welfare.

What does this suggest about how the court will exercise its power to decide constitutionality in other gov’t actions?

Gov’t can interfere with existing contracts if it has a valid police purpose, and it describes police power broadly enough to include debtor relief, protecting people from foreclosure of their mortgages

Dissent

Contracts clause was put in specifically to limit states’ power to interfere with contracts during times of economic problems.

We have the clearest possible evidence of the meaning of this clause since it emerged out of very distinct economic circumstances and that those circumstances were predicted and were very similar to the ones at issue here.

Ruling

Precedent - Property rights case in 1922 dealing with landlord tenant law.

Framers’ view was not an absolute one, but one that had to be balanced with the general public interest.

Rejection of originalism

Constitution has to grow with the country, and this has always been the case.

You have to look at the change in times and you can’t be bound entirely by what framers were thinking.

There is a far greater understanding now of the ways in which private contracts can affect the public interest.

Need to find a balance between public welfare and individual common law rights.

Reasoning established in Blaisdell – applicable to later economic rights cases in determining valid legis. purpose

Is the occasion proper for the exercise of police power – are vital interests of the public at stake?

Yes, the emergency is the threat of loss of homes and lands which furnish necessary shelter and means of subsitence.

Was the legislation addressed to a legitimate end – not for the mere advantage of particular individuals but for the protection of basic interest of society?

Was targeted towards protection of society – helps mortgagors and mortgagees alike in general, since mortgagors would not benefit by widespread foreclosure, since then they would lose a lot of money through the decline in property values and the inability to sell the property.

Is the relief provided of a character appropriate to that emergency so that it does not contravene the constitutional contract provision and 5th amendment due process?

Extending grace period is tailored to emergency.

Is it granted upon reasonable conditions?

Conditions upon which grace period is extended are not unreasonable.

Helps both mortgagors and mortgagees

Is it temporary in operation and limited to exigency which caused it to arise?

First half of 19^th century - Used aggressively to invalidate state and local laws that interfered with rights under existing contracts

Early 20^th century – rarely mentioned in court decisions.

Is the relief provided of a character appropriate to that emergency so that it does not contravene the constitutional contract provision and 5^th amendment due process?