Contracts Clause

1

• Contracts Clause

2
Article I, Section 10, Par. 1

• No state shall pass any law impairing the
  obligation of contracts
• Compare Art. VI, 1
• All Debts contracted and Engagements entered
  into, before the Adoption of this Constitution,
  shall be as valid against the United States under
  this Constitution, as under the Confederation
• continuity of debt
• motivating factor behind contracts clause
• Compare CSA constitution
• no law of Congress shall discharge any debt
  contracted before the passage of the same

3
Article I, Section 10, Par. 1

• No state shall pass any law impairing the
  obligation of contracts
• Does not apply to
• Contracts not yet formed (future contracts)
• So, liberty of contract jurisprudence had to be
  based on econ. subst. DP, not contracts clause
• Lochner subsumed contracts clause, even where it
  would apply
• Federal laws
• But, sanctity of (existing) contracts is an
  element of 5th Amd Due Process.

4
Home Bldg Ln v. Blaisdell (1934)

• Background
• Between 1930 and 1935, 750,000 farms were lost
  through foreclosure and bankruptcy sales

5
Home Bldg Ln v. Blaisdell (1934)

• Minnesota Mortgage Moratorium Law
• Extending redemption period (postponing sale)
• Affects (supercedes) terms of existing contracts
• Does law impair obligations of contract?

severity of interference
express and impled terms
qualitative analysis
e.g. good faith, public policy, sovereign right
to change law

• must harmonize constl prohibition with
  necessary residuum of state power

6
Home Bldg Ln v. Blaisdell (1934)

• Harmonizing
• Balancing of public private interests
• Note interpretivist methodology used by Hughes
• Severity of impairment
• Contract rights/obligations
• Contract remedies
• Temporary delay in foreclosure
• Strength of public interest
• Emergency measure
• Court approves

greater interference
lesser interference
appearance of deference during Lochner era
7
Energy Reserves v. KS Power (1983)

• Substantial impairment of K relationship?
• Private contract term
• Escalator clause for price of natural gas (per
  FERC)
• State law
• Price Control (abates escalator clause in
  contract)
• If not, end of inquiry
• If so, how severe an impairment?
• Degree affects level of judicial scrutiny
• Greater the impairment, the greater the state
  justification
• Expectations of parties (background principles)
• Look to extent of regulation already in place
• Escalator clause itself evidence of heavy
  regulation

protection of resonable expections is a common
theme
8
Energy Reserves v. KS Power (1983)

• Does state have significant public purpose?
• Ends analysis
• Private/special interest legislation wont count
• The broader the impact of the law, the more
  efficacious is the political process for curing
  abuse
• Windfall profits?
• protection of consumers is legit significant
  interest
• Is impairment reasonable (justified)?
• Means analysis
• Is adjustment of rights/remedies appropriate
• Is this a legal or a policy question?

9
Allied Str. Steel v. Spannaus (1978)

• Is there substantial impairment of contract?
• Contract terms
• Vesting of pension rights amounts specified by
  K
• Company reserves right to amend/terminate plan
• MN Private Pension Benefits Protection Act
• Imposes pension funding charge if company
  leaves
• Law requires ASS to pay pension benefits despite
  K
• Degree of impairment
• Expectations (background of govt regulation)
• Some pension regulation under IRC (pre ERISA)
• Severe (accelerated funding obligations)
• Is it retroactive (i.e., apply to terms already
  executed)?

10
Allied Str. Steel v. Spannaus (1978)

• ENDS Is there a significant public purpose?
• Stewart not a broad, generalized economic or
  social problem
• Compare to Blaisdell or ERG ( of persons
  benefited)
• How does the Ct. judicially know that retiree
  benefits are not as important (a public interest)
  as gas prices?
• MEANS Is this impairment justified?
• Not specifically answered. Implied not.
• Compare ERISA, enacted Sept 2, 1974
• MN law enacted April 9, 1974
• Should this be treated as a preemption case?

11
Allied Str. Steel v. Spannaus (1978)

• Brennan, White, Marshall (dissent)
• CC applies only where law abrogates obligation
• MN law doesnt affect any obligations (but
  rights)
• Use SDP where law imposes new obligations
• Exxon Corp v. Eagerton (1983)
• Per Marshall
• Distinguishes between generally applicable
  economic regulation (SDP) and those directed at
  contractual obligations
• Only the latter trigger the Contracts Clause

12
US Trust v. NJ (1977)

• Substantial impairment of contract?
• Contract terms
• Bonds issued to fund bridge secured by toll
  revenue
• State law
• Toll revenue can be used for other transit
  purposes
• Severity
• Affects marketability of bonds (hence their
  value)
• Background principles
• Reserved powers/inalienability doctrine means
  that the state can change underlying law to meet
  needs
• But here, state made a promise not to change the
  law
• Remedy/obligation distinction reinforced

13
US Trust v. NJ (1977)

• Significant Legitimate Public Purpose
• Concede yes
• Is this impairment appropriate?
• Recall, severity of impairment determines the
  degree of justification required
• Deference not appropriate when states own
  contractual obligations are rewritten by law
• Stateacts in dual capacity proprietary and
  sovereign
• Court applies strict scrutiny wrt state Ks
• Modification neither necessary nor reasonable