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. . . .”
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.
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.
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.)
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.
 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.