The Tenth
Amendment provides that “[t]he powers not delegated to the United States by the
Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or to the people.” (My
italics.)
Article
I, Section 10, paragraph 1, of the Constitution provides that “[n]o State shall
. . . pass any . . . Law impairing the Obligation of Contracts. . . .”
Oh?
We’ll
soon see how and why Minnesota’s violation of a real estate contract, aided and
abetted by the Supreme Court of the United States, produced one of the worst altruist-collectivist-statist
decision/opinion in the history of the United States.
In
combination, the Tenth Amendment and the Contract Clause are among the most
important provisions of the Constitution because they were intended to safeguard
the sacredness of private property and all that it makes possible (life itself)
in an individual rights, limited, free market government.
Every day
of our lives we encounter scores, if not hundreds, of other people. We interact
with loved ones, fellow workers, casual acquaintances, total strangers,
landlords, employers, clerks, physicians. Most of these interactions are
voluntary.
To the
extent voluntarily chosen relationships create important benefits and
obligations, the details must be objectified and easily recalled. Hence, many
are expressed in formal contracts.
Contracts
embody the voluntary arrangements of free people. Without contracts, little or
nothing would ever be accomplished. Because enforceable private choices are a
cornerstone of individual rights, contracts are indispensable to objectify and
protect those choices. For this reason, the Founders specifically provided in
Article I, section 10 that state governments were prohibited from enacting any
law “impairing the Obligation of Contracts.” This provision was designed to
insert itself between contracting parties and the states, preventing the latter
from rewriting (let alone, nullifying) private agreements either for the
government’s own purposes or for private citizens’ benefit.
The genesis
of the Contract Clause is found in debtor relief laws. Early on, first colonies
and then states enacted laws simply wiping out debt, at the great expense of
creditors. These debtor relief laws were nakedly altruism, collectivism, and
statism at work. One person’s debt is another person’s asset. Wipe out the
debt, and government has used its monopoly on physical force to steal the asset.[1]
With this
context, let’s see whether in America a contract is worth the paper it’s
written on.
Blaisdell v. Home Building & Loan Association is the poster case for
successful state and Supreme Court impairment of contracts.
Mr. and
Mrs. John H. Blaisdell sat down with the Home Building & Loan Association
and contracted for a mortgage on a two-story residential building in
Minneapolis, Minnesota.
A
mortgage is simply another name for a certain kind of contract. The owner (or
would-be owner) of real property (the “mortgagor”) pledges that property to a
lender (the “mortgagee”) as security for a loan. Usually, the proceeds of the
loan are used to purchase the property. A common example is the financing
arrangement for the purchase of a home. (There also can be “chattel” mortgages
for personal property, such as financed purchases of automobiles.)
The
Blaisdells’ mortgage contract with their lender bank contained customary,
rather simple, terms.
In return
for putting up their property as collateral, the Blaisdells received money from
the lender. The Blaisdells agreed to repay the loan in regular monthly
installments of principal and interest.
If the
Blaisdells did not make the payments — if they defaulted on their contractual
agreement, that is, breached their contract — the lender could protect its
creditor position by foreclosing on the property and selling it at auction.
If the
foreclosure sale netted more than the amount Home Building & Loan
Association was owed, the excess proceeds would go to the Blaisdells. If it
netted less, the Blaisdells would owe the lender the difference (a
“deficiency”). All this was provided in the contract.
Another
provision of the mortgage contract — automatically inserted as a requirement
of Minnesota law — was a one-year redemption period following a foreclosure
sale, during which the Blaisdells could reacquire the property for the price at
which it had been sold when they lost it at auction.
The buyer
at the foreclosure sale could get good title only when the one-year redemption
period had expired without the Blaisdells having exercised their statutory
right of redemption. (Let us put aside for now by what right the Minnesota
legislature could enact a law requiring private, voluntary contracts to include
a right of redemption— a state legislative power whose source is far from clear,
or defensible.)
For a few
years, the Blaisdells made their regular mortgage payments. Then they stopped.
A foreclosure
sale followed, and the lender “bought” the property for exactly the amount then
owed on the mortgage. The sale yielded no excess proceeds for the Blaisdells,
and no deficiency was owed by them to Home Building & Loan Association,
which now owned the property subject to the Blaisdells’ one-year statutory
right of redemption.
Because
the foreclosure sale occurred on May 2, 1932, the Blaisdells had until
May 2, 1933 to redeem the property.
But a few
weeks before that date, providence, in the guise of the State of Minnesota
Legislature, intervened. On April 18, 1933, a mere fourteen days before the
one-year redemption period would expire, the state enacted the “Minnesota
Mortgage Moratorium Law,” which rewrote the contractual agreement between the
Blaisdells and Home Building & Loan Association.
Why?
As the
Minnesota Legislature explained,
Whereas,
the severe financial and economic depression existing for several years past
has resulted in extremely low prices for the products of the farms and
the factories, a great amount of unemployment, an almost complete lack
of credit for farmers, business men and property owners and a general and extreme
stagnation of business, agriculture and industry, and
Whereas,
many owners of real property, by reason of said conditions, are unable, and it
is believed, will for some time be unable to meet all payments as they
come due of taxes, interest and principal of mortgages on their properties and
are, therefore, threatened with loss of such properties through mortgage
foreclosure and judicial sales thereof, and
Whereas,
many such properties have been and are being bid in at mortgage foreclosure . .
. sales for prices much below what is believed to be their real values and
often for much less than the mortgage or . . . indebtedness, thus
entailing deficienc[ies] . . . against the mortgage[es] . . . . and
Whereas,
it is believed, and the Legislature of Minnesota hereby declares its belief,
that the conditions existing as hereinbefore set forth has created an emergency
of such nature that justifies and validates legislation for the extension of
the time of redemption from mortgage foreclosure and execution sales and other
relief of a like character; and
Whereas,
The State of Minnesota possesses the right under its police power to declare a state
of emergency to exist, and
Whereas,
the inherent and fundamental purposes of our government is to safeguard the
public and promote the general welfare of the people; and
Whereas,
under existing conditions the foreclosure of many real estate mortgages
by advertisement would prevent fair, open and competitive bidding . . . and
Whereas,
it is believed, and the Legislature of Minnesota hereby declares its belief,
that the conditions existing as hereinbefore set forth have created an emergency
of such a nature that justifies and validates changes in legislation providing
for the temporary manner, method, terms and conditions upon which mortgage
foreclosure sales may be had or postponed and jurisdiction to administer
equitable relief in connection therewith may be conferred upon the District
Court,
* * *
Section
1. Emergency Declared to Exist. In view of the situation . . . the
Legislature of the State of Minnesota hereby declares that a public economic
emergency does exist in the State of Minnesota.
(My
italics throughout entire quotation.)
Sound
familiar?
Just
substitute for the “Minnesota Legislature” the “Congress (and President) of the
United States,” and these words, and the rationale behind them, could have been
written today.
In order
to implement the state’s newly declared mortgagor/debtor-relief policy, the
Minnesota Mortgage Moratorium Act mandated that foreclosure sales could be
postponed, and the redemption period extended until May 1, 1935—two
years after the Blaisdells could have redeemed their mortgaged property under
the law that existed when they made their contract with the bank.
Taking
advantage of the Moratorium Act, the Blaisdells asked a Minnesota court to
enter an order extending their redemption period.
The court
— apparently recognizing that Article I, section 10 of the federal Constitution
expressly prohibits a state from enacting any law “impairing the obligation of
contracts,” and realizing that the Moratorium Act did just that — refused to
grant the extension.
So, the
Blaisdells appealed.
The
Minnesota Supreme Court reversed the lower court and granted the two-year
extension (conditioned on the Blaisdells paying “rent” of forty dollars each
month).
Consider
what had happened.
The
Blaisdells had put up their real estate as security for a loan from Home
Building & Loan Association. The loan had been defaulted. The lender had to
repurchase the property and then wait almost a year until the statutory
redemption period expired before it could obtain clear title.
Near the
end of that period, the Minnesota Legislature rewrote the Blaisdell–Home
Building & Loan mortgage contract, the net result being that the lender
would have to wait a minimum of another two years before obtaining the property
— all the while receiving “rent” instead of the contractually agreed-upon
mortgage payments.
We know
why the Minnesota Legislature enacted the Moratorium Act. But what was the
rationale of the Supreme Court of Minnesota for upholding it?
According
to the later opinion of the Supreme Court of the United States, which I’ll get
to in a moment, the Minnesota court upheld the moratorium law because it was
.
. . an emergency measure. Although conceding that the obligations of the
mortgage contract were impaired [despite the Constitutional prohibition of
Article I, section 10], the [Minnesota Supreme Court] decided that what it thus
described as an impairment was, notwithstanding the contract clause of the
federal Constitution, within the police power of the state as that power was
called into execution by the public economic emergency which the
Legislature had found to exist. (My italics.)
Actually,
the Minnesota Supreme Court had been even more explicit, and arrogant, about
what motivated its decision:
In
addition to the weight to be given the determination of the Legislature that an
economic emergency exists which demands relief, the court must take notice
of other considerations. The members of the Legislature come from every
community of the state and from all the walks of life. They are familiar with
conditions generally in every calling, occupation, profession, and business in
the state. Not only they, but the courts must be guided by what is common
knowledge. It is common knowledge that in the last few years land values
have shrunk enormously. Loans made a few years ago upon the basis of the
then going values cannot possibly be replaced on the basis of present values. (My italics.)
Justice
Olsen of the Minnesota Supreme Court, in a concurring opinion, added the
following:
The
present nationwide and world wide business and financial crisis has the
same results as if it were caused by flood, earthquake, or disturbance in
nature. It has deprived millions of persons in this nation of their employment
and means of earning a living for themselves and their families; it has destroyed
the value of and the income from all property on which thousands of people
depended for a living; it actually has resulted in the loss of their
homes by a number of our people, and threatens to result in the loss of
their homes by many other people in this state; it has resulted in such widespread
want and suffering among our people that private, state and
municipal agencies are unable to adequately relieve the want and suffering, and
Congress has found it necessary to step in and attempt to remedy the
situation by federal aid. Millions of the people’s money were and are yet tied
up in closed banks and in business enterprises.” (My italics.)
In other
words, by “common knowledge” things were rough for depression-era
borrowers—just as they were in the early 200s for some, especially those who
tried to game the system by purchasing homes without adequate means to pay for
them, in the expectation that the real estate bubble would everlastingly get
bigger and bigger and never burst—let alone for the wheelers and dealers on
Wall Street whose voracious appetite for “investment” vehicles could be
satisfied only by more and more rotten paper debt.
But times
were tough for Home Building & Loan Association (and other lenders) too, so
it appealed the case to the Supreme Court of the United States, to protect
itself, its stockholders, and its depositors—others who were similarly
suffering economic distress.
There,
Chief Justice Charles Evans Hughes authored the Court’s majority opinion upholding
the constitutionality of the Minnesota Mortgage Moratorium Law.
A
significant portion of his opinion consists of a survey of some of the Court’s
previous cases, based on which Hughes enunciated a shockingly candid
conclusion:
It
is manifest from this review of our decisions that there has been a growing
appreciation of public needs and of the necessity of finding ground for a
rational compromise between individual rights and public welfare. The settlement and consequent
contraction of the public domain, the pressure of a constantly increasing density
of population, the interrelation of the activities of our people and the
complexity of our economic interests, have inevitably led to an
increased use of the organization of society in order to protect the very bases
of individual opportunity. Where, in earlier days, it was thought that only the
concerns of individuals or of classes were involved, and that those of the
state itself were touched only remotely, it has later been found that the
fundamental interests of the state are directly affected; and that the
question is no longer merely that of one party to a contract as against
another, but of the use of reasonable means to
safeguard the economic structure upon which the good of all depends.
(My italics. Double
underlining intentional.)
What
Chief Justice Hughes was saying could not be clearer.
Postulating
an increasingly complicated social environment in which “the good of all” was
the standard of value, Hughes held that “public needs,” “public welfare” and
“fundamental interests of the state” trumped, and had to be protected from
something perniciously antithetical: “individual rights.” Necessary, according
to Hughes and the Court’s majority, was a “rational compromise between
individual rights and public welfare.”
Since the
nature of a compromise is “a settlement in which each side gives up some
demands or makes concessions,” the concept can have no application to
individual rights, which are either absolute or nonexistent, and not subject of
compromise.
Indeed,
the majority’s idea of a compromise — between the sanctity of contracts
supposedly guaranteed against government impairment by a specific provision of
the Constitution (Article I, section 10) and the “public welfare” that invented
a two-year mortgage moratorium —was to allow Minnesota to rewrite the core
provision of the Blaisdells’ contract with their lender, namely repayment of
the loan.
So much
for compromise — and contracts, and, for that matter, individual rights, and
limited government.
Unfortunately,
the dissenting opinion by Justice Sutherland went unheeded.
With my
bracketed explanatory and other comments and more modern paragraphing (the
latter to enhance clarity for current readers), here is much of Justice
Sutherland’s very lengthy dissent. Despite its length, for those who love the
Constitution and its attempt to safeguard the sanctity of contracts and the
individual rights and limited government that make them possible, it is
important, indeed essential, reading. (I have made no substantive changes in
the thrust of Justice Sutherland’s opinion, though I have done some cutting. It
is lengthy, but incomparable!)
Few
questions of greater moment than that just decided [by this Court] have been
submitted for judicial inquiry during this generation.
He
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.
[The
“Contract Clause”] . . . is in grave danger, because the majority decision
legitimizes violation of a private contract (the mortgage) and, more broadly, limitations
expressly embodied in the Constitution are even more threatened.
A
provision of the Constitution, it is hardly necessary to say, does not admit of
two distinctly opposite interpretations. It does not mean one thing at
one time and an entirely different thing at another time. [Justice
Brennan and his band of “Living Constitutionalists” notwithstanding. HMH]
If
the contract impairment clause, when framed and adopted [by the Founders],
meant that the terms of a contract for the payment of money could not be
altered in invitum [“against an unwilling party; against one not
assenting”] by a state statute enacted for the relief of hardly pressed debtors
to the end and with the effect of postponing payment or enforcement during and
because of an economic or financial emergency, it is but to state the obvious
to say that it means the same now. [An early, though wonderful, “originalist”
statement. HMH]
This
view, at once so rational in its application to the written word, and so
necessary to the stability of constitutional principles, though from time to
time challenged, has never, unless recently, been put within the realm of doubt
by the decisions of this court.
The
true rule was forcefully declared in Ex parte Milligan, in the face of
circumstances of national peril and public unrest and disturbance far greater
than any that exist today. In that great case, this court said that the
provisions of the Constitution there under consideration had been expressed by
our ancestors in such plain English words that it would seem the ingenuity of
man could not evade them, but that after the lapse of more than seventy years
they were sought to be avoided. ‘Those great and good men,’ the Court said,
‘foresaw that troublous times would arise, when rules and people would become
restive under restraint, and seek by sharp and decisive measures to accomplish
ends deemed just and proper; and that the principles of constitutional liberty
would be in peril, unless established by irrepealable law.
* * *
The
present exigency is nothing new.
From
the beginning of our existence as a nation, periods of depression, of
industrial failure, of financial distress, of unpaid and unpayable
indebtedness, have alternated with years of plenty. The vital lesson that expenditure beyond income begets poverty, that
public or private extravagance, financed by promises to pay, either must end in
complete or partial repudiation or the promises be fulfilled by self-denial and
painful effort, though constantly taught by bitter experience, seems never to
be learned; and the attempt by legislative devices to shift the
misfortune of the debtor to the shoulders of the creditor without coming
into conflict with the contract impairment clause has been persistent and
oft-repeated.
The
defense of the Minnesota law is made upon grounds which were discountenanced by
the makers of the Constitution and have many times been rejected by this Court.
That defense should not now succeed because it constitutes an effort to
overthrow the constitutional provision by an appeal to facts and circumstances
identical with those which brought it into existence.
With
due regard for the processes of logical thinking, it legitimately cannot be
urged that conditions which produced the rule may now be invoked to destroy it.
The
Minnesota statute either impairs the obligation of contracts or it does not. (My italics throughout.)
According
to Justice Sutherland, it did!
Justice
Sutherland’s dissent in Blaisdell is virtually unknown today even, or
especially, among the professoriate and legal profession. It is a devastating
rebuttal to Hughes’s majority opinion, a resounding paean to originalism, and was
the prescient canary in the coalmine for what can happen to the sanctity of
contracts at the hands of state legislatures and the Supreme Court. Sadly, the 5–4
majority decision in Blaisdell has in subsequent Contract Clause cases,
killed the canary.
Although
since the Blaisdell decision in 1934 there has been some amelioration of
states’ power to nullify the Contract Clause, the Blaisdell precedent still stands, and we have seen other examples
of its pernicious use. Thus, if for whatever reason – Coronavirus, inflation,
riots, war — America’s real estate situation worsens and the government’s
jawboning and arm-twisting of lenders proves inadequate to forestall
foreclosures, no one should be surprised if Congress enacts a federal Mortgage
Moratorium Act, or the then-President decrees one by Executive Order.
But as
this is written, mortgages are only a relatively small part of the financial
meltdown problem. Now, the financial undertow caused by oceans of toxic debt
paper, deficit spending, national debt, is sucking under banks, credit card
providers, the auto industry, and God knows who else. Now, it appears that the world
financial and economic structure is drowning. Or soon be.
And what
life preserver may Congress and the President, in their infinite stupidity and
disdain for individual rights, limited government, and the free market, throw
into the churning financial waters? Using the Minnesota Mortgage Moratorium Act
as a template and the Supreme Court’s 5-4 decision in Blaisdell v. Home
Building & Loan Association as precedent, it will be a Federal Debt
Relief Act. There is already open talk of one.
If
enacted for student debt or any other reason, it will be more of the poison
that caused the disease and killed the canary.
[1]
Traditionally, however, there were some exceptions allowing
government to interfere with contract rights.
For one, states (and the federal government, in the Fifth
Amendment) possess the power to condemn private property for public use if
“just compensation” is paid.
Another exception is the state police power. As noted
earlier, under the Tenth Amendment it was long understood that the states had
the power to legislate regarding the public health, safety, welfare, and
morals. For example, if Party A and Part B contract to license the former to
dump raw sewage on the latter’s empty lot, the government has the power to nullify
the contract to protect the public health.
If a company decides when they buy a nursing home that to
save money, they are going to contract to remove the sprinkler system, the fire
marshals will promptly nullify that agreement as a threat to the residents’
safety. As far as morals are concerned, a lease on a bordello where
prostitution is illegal will be void on public policy grounds despite the
Contract Clause.
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