The Court’s Assault on Contract

Summary of Article: The court’s role in the death of contracts. One of the few restrictions the federal Constitution imposes on states is that they not pass laws “impairing the obligation of contracts.” And yet when the New Deal-era supreme court was faced with a depression-era, Minnesota debtor’s relief statute that suspended mortgage contract foreclosures, the court, mirabile dictu, found a way to hold the impairment of those contracts constitutional.

Discussion:

The case is reported by the Oxford Companion to the US Supreme Court [1]:

“Home Building and Loan Association v. Blaisdell, 290 U.S. 398 (1934), [2] argued 8 and 9 Nov. 1933, decided 8 June 1934 by vote of 5 to 4; Hughes for the Court, Sutherland, Butler, McReynolds, and Van Devanter in dissent. The Court’s decision in Home Building and Loan Association v. Blaisdell was important not only because it upheld a critical state law passed during the Great Depression but also because it revealed the sharp divisions on the high court over the proper response to the economic crisis.

The legislation at issue was the 1933 Minnesota Mortgage Moratorium Law. The act authorized a Minnesota state court, when called upon by a beleaguered debtor, to consider exempting property from foreclosure ‘during the continuance of the emergency and in no event beyond May 1, 1935.’ The law was passed by a legislature especially mindful of the problems of farmers facing mortgage forclosures.

This particular case arose as a result of the desire of Mr. and Mrs. John H. Blaisdell, who had received a mortgage on a house and lot from the Home Building and Loan Association, to avoid foreclosure and to extend their mortgage redemption period. A Minnesota district court sided with the Blaisdells on the condition that certainly monthly installments be paid in a timely fashion. The Supreme Court of Minnesota affirmed the ruling. The Loan Association appealed to the U.S. Supreme Court, maintaining that the Moratorium Law was in conflict with the Contracts Clause in Article 1, Section 10 of the Constitution and the due process and equal protection clauses of the Fourteenth Amendment. The Contracts Clause argument proved especially crucial. The Loan Association maintained that the clause’s language—‘No State shall enter into any . . .Law impairing the Obligation of Contracts’—prohibited Minnesota from altering the contractual relationship between the Blaisdell’s and the Loan Association.

Chief Justice Charles Evans Hughes and Justice Owen J. Roberts joined with the liberals and ruled the Moratorium Law constitutional by a vote of 5 to 4. Hughes wrote the majority opinion. He submitted that ‘while emergency does not create power, emergency may furnish the occasion for the exercise of power’ (p. 426). In what has been called the most important Contracts Clause case since Charles River Bridge v. Warren Bridge (1837), Hughes stated that the Contracts Clause was not absolute and that a state always possessed the authority to safeguard the vital interests of its citizens. Hughes found a ‘growing appreciation . . . of the necessity of finding ground between individual rights and public welfare.’ The chief justice concluded that the ‘question is no longer merely that of one party to a contract against another but of the use of reasonable means to safeguard the economic structure upon which the good of all depends’ (p. 442).

For the four conservative dissenters, Justice George Sutherland argued that the Contracts Clause should be interpreted literally. He refused to acknowledge that emergencies could justify state authorized modification of contracts. Sutherland predicted that if the Court allowed the Minnesota Moratorium Act to stand, it could well be the harbinger of greater invasions of the sanctity of contracts. And, if the Contracts Clause was so interpreted, Sutherland lamented, all constitutional restrictions on legislative prerogative might collapse. Essentially, Sutherland threw down the constitutional gauntlet. Again and again over the next three years, the “Four Horsemen” would saddle up and ride out to attempt to thwart state and national attempts to come to terms with the hardships imposed by the Great Depression.” [3] [That last remark by the Oxford Companion was a cheap shot, for Sutherland’s dissent captures the illicit and unconstitutional reasoning employed by the majority of the court:]

‘Few questions of greater moment than that just decided have been submitted for judicial inquiry during this generation. [Justice Hughes] simply closes his eyes to the necessary implications of the decision who fails to see in it the potentiality of future gradual but ever-advancing encroachments upon the sanctity of private and public contracts. The effect of the Minnesota legislation, though serious enough in itself, is of trivial significance compared with the far more serious and dangerous inroads upon the limitations of the Constitution which are almost certain to ensue as a consequence naturally following any step beyond the boundaries fixed by that instrument. And those of us who are thus apprehensive of the effect of this decision would, in a matter so important, be neglectful of our duty should we fail to spread upon the permanent records of the court the reasons which move us to the opposite view.’

* * *

And in South Carolina v. United States, 199 U.S. 437, 448 , 449 S., 26 S.Ct. 110, 111, 4 Ann.Cas. 737, in an opinion by Mr. Justice Brewer, this court quoted these words with approval and said:

‘The Constitution is a written instrument. As such its meaning does not alter. That which it meant when adopted, it means now. * * * Those things which are within its grants of power, as those grants were understood when made, are still within them; and those things not within them remain still excluded.’ [290 U.S. 398, 451]

* * *

‘I quite agree with the opinion of the Court that whether the legislation under review is wise or unwise is a matter with which we have nothing to do. Whether it is likely to work well or work ill presents a question entirely irrelevant to the issue. The only legitimate inquiry we can make is whether it is constitutional. If it is not, its virtues, if it have any, cannot save it; if it is, its faults cannot be invoked to accomplish its destruction. If the provisions of the Constitution be not upheld when they pinch as well as when they comfort, they may as well be abandoned.’”

Sutherland and his fellow Four Horseman of the Apocalypse are awarded the 1934 Blue Ribbon for their very unpopular defense of the Constitution. The same issue arose again in the Gold Clause Cases about which I’ve already filed a Report. See “The Gold Clause Cases are Unconstitutional” @ The Gold Clause Cases are Unconstitutional

Enough said.

Founding Father Quote:

James Madison: “Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. The two former are expressly prohibited by the declarations prefixed to some of the State constitutions, and all of them are prohibited by the spirit and scope of these fundamental charters. Our own experience has taught us, nevertheless, that additional fences against these dangers ought not to be omitted. Very properly, therefore, have the convention added this constitutional bulwark in favor of personal security and private rights; and I am much deceived if they have not, in so doing, as faithfully consulted the genuine sentiments as the undoubted interests of their constituents. The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less informed part of the community. They have seen, too, that one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding. They very rightly infer, therefore, that some thorough reform is wanting, which will banish speculations on public measures, inspire a general prudence and industry, and give a regular course to the business of society.” Federalist No. 44 @ http://www.constitution.org/fed/federa44.htm

Madison’s words, though immediately directed at the states, are also applicable as against federal legislation either impairing the obligations of contract or impairing the 5th Amendment takings clause.

Endnotes

[1] http://www.answers.com/topic/home-building-and-loan-association-v-blaisdell#ixzz1SZAmYmi1. Article by John W. Johnson. The Oxford Companion to the Supreme Court of the United States, edited by Kermit L. Hall, Oxford University Press. An accessible reference work that contains biographies of all US Supreme Court justices, their important decisions and legal philosophies; and basic terminology and constitutional doctrines related to the Court.

[2] The full case is found at http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=case&court=us&vol=290&page=398.

[3] Id. n. 1.

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Published in: on March 17, 2012 at 7:24 am  Leave a Comment  

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