The Constitution of the United States of America: Analysis and Interpretation Part 35

Ogden _v._ Saunders.--These obscurities were finally cleared up for most cases in Ogden _v._ Saunders,[1695] in which the temporal relation of the statute and the contract involved was exactly reversed--the former antedating the latter. Marshall contended, but unsuccessfully, that the statute was void, inasmuch as it purported to release the debtor from that original, intrinsic obligation which always attaches under natural law to the acts of free agents. "When," he wrote, "we advert to the course of reading generally pursued by American statesmen in early life, we must suppose that the framers of our Const.i.tution were intimately acquainted with the writings of those wise and learned men whose treatises on the laws of nature and nations have guided public opinion on the subjects of obligation and contract," and that they took their views on these subjects from those sources. He also posed the question of what would happen to the obligation of contracts clause if States might pa.s.s acts declaring that all contracts made subsequently thereto should be subject to legislative control.[1696]

For the first and only time majority of the Court abandoned the Chief Justice's leaders.h.i.+p. Speaking by Justice Was.h.i.+ngton it held that the obligation of private contracts is derived from the munic.i.p.al law--State statutes and judicial decisions--and that the inhibition of article I, section 10, is confined to legislative acts made after the contracts affected by them, with one exception. For by a curiously complicated line of reasoning it was also held in this same case that when the creditor is a nonresident, then a State may not by an insolvent law rights under a contract, albeit one of later date.

With the proposition established that the obligation of a private contract comes from the _munic.i.p.al_ law in existence when the contract is made, a further question presents itself, namely, what part of the munic.i.p.al law is referred to? No doubt, the law which determines the validity of the contract itself is a part of such law. Also, the law which interprets the terms used in the contract, or which supplies certain terms when others are used; as for instance, const.i.tutional provisions or statutes which determine what is "legal tender" for the payment of debts; or judicial decisions which construe the term "for value received" as used in a promissory note, and so on. In short, any law which at the time of the making of a contract goes to measure the rights and duties of the parties to it in relation to each other enters into its obligation.

Remedy a Part of the Obligation

Suppose, however, that one of the parties to a contract fails to live up to his obligation as thus determined. The contract itself may now be regarded as at an end; but the injured party, nevertheless, has a new set of rights in its stead, those which are furnished him by the remedial law, including the law of procedure. In the case of a mortgage, he may foreclose; in the case of a promissory note, he may sue; in certain cases, he may demand specific performance. Hence the further question arises, whether this remedial law is to be considered a part of the law supplying the obligation of contracts. Originally, the predominating opinion was negative, since as we have just seen, this law does not really come into operation until the contract has been broken.

Yet it is obvious that the sanction which this law lends to contracts is extremely important--indeed, indispensable. In due course it became the accepted doctrine that that part of the law which supplies one party to a contract with a remedy if the other party does not live up to his agreement, as authoritatively interpreted, entered into the "obligation of contracts" in the const.i.tutional sense of this term, and so might not be altered to the material weakening of existing contracts. In the court's own words, "Nothing can be more material to the obligation than the means of enforcement. Without the remedy the contract may, indeed, in the sense of the law, be said not to exist, and its obligation to fall within the cla.s.s of those moral and social duties which depend for their fulfillment wholly upon the will of the individual. The ideas of validity and remedy are inseparable, * * *"[1697]

Establishment Of The Rules.--This rule was first definitely announced in 1843 in the case of Bronson _v._ Kinzie.[1698] Here an Illinois mortgage giving the mortgagee an unrestricted power of sale in case of the mortgagor's fault was involved, along with a later act of the legislature which required mortgaged premises to be sold for not less than two-thirds of the appraised value, and allowed the mortgagor a year after the sale to redeem them. It was held that the statute, in altering the preexisting remedies to such an extent, violated the const.i.tutional prohibition, and hence was void. The year following a like ruling was made in the case of McCracken _v._ Hayward[1699] as to a statutory provision that personal property should not be sold under execution for less than two-thirds of its appraised value.

Qualifications Of The Rule.--But the rule ill.u.s.trated by these cases does not signify that a State may make no changes in its remedial or procedural law which affect existing contracts. "Provided," the Court has said, "a substantial or efficacious remedy remains or is given, by means of which a party can enforce his rights under the contract, the Legislature may modify or change existing remedies or prescribe new modes of procedure."[1700] Thus States are constantly remodelling their judicial systems and modes of practice unembarra.s.sed by the obligation of contracts clause.[1701] The right of a State to abolish imprisonment for debt was early a.s.serted.[1702] Again the right of a State to shorten the time for the bringing of actions has been affirmed even as to existing causes of action, but with the proviso added that a reasonable time must be left for the bringing of such actions.[1703] On the other hand, a statute which withdrew the judicial power to enforce satisfaction of a certain cla.s.s of judgments by mandamus was held invalid.[1704] In the words of the Court: "Every case must be determined upon its own circ.u.mstances;"[1705] and it later added: "In all such cases the question becomes, * * *, one of reasonableness, and of that the legislature is primarily the judge."[1706]

The Munic.i.p.al Bond Cases.--There is one cla.s.s of cases resulting from the doctrine that the law of remedy const.i.tutes a part of the obligation of a contract to which a special word is due. This comprises cases in which the contracts involved were munic.i.p.al bonds.

While a city is from one point of view but an emanation from the government's sovereignty and an agent thereof, when it borrows money it is held to be acting in a corporate or private capacity, and so to be suable on its contracts. Furthermore, as was held in the leading case of Von Hoffman _v._ Quincy,[1707] "where a State has authorized a munic.i.p.al corporation to contract and to exercise the power of local taxation to the extent necessary to meet its engagements, the power thus given cannot be withdrawn until the contract is satisfied." In this case the Court issued a mandamus compelling the city officials to levy taxes for the satisfaction of a judgment on its bonds in accordance with the law as it stood when the bonds were issued.[1708] Nor may a State by dividing an indebted munic.i.p.ality among others enable it to escape its obligations. In such a case the debt follows the territory, and the duty of a.s.sessing and collecting taxes to satisfy it devolves upon the succeeding corporations and their officers.[1709] But where a munic.i.p.al organization has ceased practically to exist through the vacation of its offices, and the government's function is exercised once more by the State directly, the Court has thus far found itself powerless to frustrate a program of repudiation.[1710] However, there is no reason why the State should enact the role of _particeps criminis_ in an attempt to relieve its munic.i.p.alities of the obligation to meet their honest debts. Thus in 1931, during the Great Depression, New Jersey created a Munic.i.p.al Finance Commission with power to a.s.sume control over its insolvent munic.i.p.alities. To the complaint of certain bondholders that this legislation impaired the contract obligations of their debtors, the Court, speaking by Justice Frankfurter, pointed out that the practical value of an unsecured claim against a city is "the effectiveness of the city's taxing power," which the legislation under review was designed to conserve.[1711]

Private Contracts and the Police Power

The increasing subjection of public grants to the State's police power has been previously pointed out. That purely private contracts should be in any stronger situation in this respect would obviously be anomalous in the extreme. In point of fact, the ability of private parties to curtail governmental authority by the easy devise of contracting with one another is, with an exception to be noted, even less than that of the State to tie its own hands by contracting away its own powers. So, when it was contended in an early Pennsylvania case, than an act prohibiting the issuance of notes by unincorporated banking a.s.sociations was violative of the obligation of contracts clause because of its effect upon certain existing contracts of members of such a.s.sociations, the State Supreme Court answered: "But it is said, that the members had formed a contract _between themselves_, which would be dissolved by the stoppage of their business; and what then? Is that such a violation of contracts as is prohibited by the Const.i.tution of the United States?

Consider to what such a construction would lead. Let us suppose, that in one of the States there is no law against gaming, c.o.c.k-fighting, horse-racing or public masquerades, and that companies should be formed for the purpose of carrying on these practices; * * *" Would the legislature then be powerless to prohibit them? The answer returned, of course, was no.[1712]

The prevailing doctrine is stated by the Supreme Court of the United States in the following words: "It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected. * * * In other words, that parties by entering into contracts may not estop the legislature from enacting laws intended for the public good."[1713]

So, in an early case we find a State recording act upheld as applying to deeds dated before the pa.s.sage of the act.[1714] Later cases have brought the police power in its more customary phases into contact with private, as well as with public contracts. Lottery tickets, valid when issued, were necessarily invalidated by legislation prohibiting the lottery business;[1715] contracts for the sale of beer, valid when entered into, were similarly nullified by a State prohibition law;[1716]

and contracts of employment were modified by later laws regarding the liability of employers and workmen's compensation.[1717] Likewise a contract between plaintiff and defendant did not prevent the State from making the latter a concession which rendered the contract worthless;[1718] nor did a contract as to rates between two railway companies prevent the State from imposing different rates;[1719] nor did a contract between a public utility company and a customer protect the rates agreed upon from being superseded by those fixed by the State.[1720] Similarly, a contract for the conveyance of water beyond the limits of a State did not prevent the State from prohibiting such conveyance.[1721]

Emergency Legislation.--But the most striking exertions of the police power touching private contracts, as well as other private interests, within recent years have been evoked by war and economic depression. Thus in World War I the State of New York enacted a statute which, declaring that a public emergency existed, forbade the enforcement of covenants for the surrender of the possession of premises on the expiration of leases, and wholly deprived for a period owners of dwellings, including apartment and tenement houses, within the City of New York and contiguous counties of possessory remedies for the eviction from their premises of tenants in possession when the law took effect, providing the latter were able and willing to pay a reasonable rent. In answer to objections leveled against this legislation on the basis of the obligation of contracts clause, the Court said: "But contracts are made subject to this exercise of the power of the State when otherwise justified, as we have held this to be."[1722] In a subsequent case, however, the Court added that, while the declaration by the legislature of a justifying emergency was ent.i.tled to great respect, it was not conclusive; that a law "depending upon the existence of an emergency or other certain state of facts to uphold it may cease to operate if the emergency ceases or the facts change," and that whether they have changed was always open to judicial inquiry.[1723]

Individual Rights Versus Public Welfare.--Summing up the result of the cases above referred to, Chief Justice Hughes, speaking for the Court in Home Building and Loan a.s.sociation _v._ Blaisdell,[1724]

remarked in 1934: "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 cla.s.ses 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. * * * The principle of this development is, * * * [he added]

that the reservation of the reasonable exercise of the protective power of the States is read into all contracts * * *."[1725]

Evaluation of the Clause Today

Yet it should not be inferred that the obligation of contracts clause is today totally moribund even in times of stress. As we have just seen it still furnishes the basis for some degree of judicial review as to the substantiality of the factual justification of a professed exercise by a State legislature of its police power; and in the case of legislation affecting the remedial rights of creditors, it still affords a solid and palpable barrier against legislative erosion. Nor is this surprising in view of the fact that, as we have seen, such rights were foremost in the minds of the framers of the clause. The court's att.i.tude toward insolvency laws, redemption laws, exemption laws, apprais.e.m.e.nt laws and the like has always been that they may not be given retroactive operation;[1726] and the general lesson of these earlier cases is confirmed by the court's decisions between 1934 and 1945 in certain cases involving State moratorium statutes. In Home Building and Loan a.s.sociation _v._ Blaisdell,[1727] the leading case, a closely divided Court sustained the Minnesota Moratorium Act of April 18, 1933, which, reciting the existence of a severe financial and economic depression for several years and the frequent occurrence of mortgage foreclosure sales for inadequate prices, and a.s.serting that these conditions had created an economic emergency calling for the exercise of the State's police power, authorized its courts to extend the period for redemption from foreclosure sales for such additional time as they might deem just and equitable, although in no event beyond May 1, 1935. The act also left the mortgagor in possession during the period of extension, subject to the requirement that he pay a reasonable rental for the property as fixed by the Court, at such time and in such manner as should be determined by the Court. Contemporaneously, however, less carefully drawn statutes from Missouri and Arkansas, acts which were less considerate of creditor's rights, were set aside as violative of the contracts clause.[1728] "A State is free to regulate the procedure in its courts even with reference to contracts already made," said Justice Cardozo for the Court, "and moderate extensions of the time for pleading or for trial will ordinarily fall within the power so reserved. A different situation is presented when extensions are so piled up as to make the remedy a shadow. * * * What controls our judgment at such times is the underlying reality rather than the form or label. The changes of remedy now challenged as invalid are to be viewed in combination, with the c.u.mulative significance that each imparts to all. So viewed they are seen to be an oppressive and unnecessary destruction of nearly all the incidents that give attractiveness and value to collateral security."[1729] On the other hand, in the most recent of this category of cases, the Court gave its approval to an extension by the State of New York of its moratorium legislation. While recognizing that business conditions had improved, the Court was of the opinion that there was reason to believe that "'the sudden termination of the legislation which has d.a.m.ned up normal liquidation of these mortgages for more than eight years might well result in an emergency more acute than that which the original legislation was intended to alleviate.'"[1730]

And meantime the Court had sustained legislation of the State of New York under which a mortgagee of real property was denied a deficiency judgment in a foreclosure suit where the State court found that the value of the property purchased by the mortgagee at the foreclosure sale was equal to the debt secured by the mortgage.[1731] "Mortgagees," the Court said, "are const.i.tutionally ent.i.tled to no more than payment in full. * * * To hold that mortgagees are ent.i.tled under the contract clause to retain the advantages of a forced sale would be to dignify into a const.i.tutionally protected property right their chance to get more than the amount of their contracts. * * * The contract clause does not protect such a strategical, procedural advantage."[1732]

Statistical Data Pertinent to the Clause

The obligation of contracts clause attained the high point of its importance in our Const.i.tutional Law in the years immediately following the Civil War.[1733] Between 1865 and 1873 there were twenty cases in which State acts were held invalid under the clause, of which twelve involved public contracts. During the next fifteen years, which was the period of Waite's chief justices.h.i.+p, twenty-nine cases reached the Court in which State legislation was set aside under the clause. Twenty-four of these involved public contracts. The decline of the importance of the clause as a t.i.tle in Const.i.tutional Law began under Chief Justice Fuller (1888 to 1910). During this period less than 25% of the cases involving the validity of State legislation involved this rubric. In twenty-eight of these cases, of which only two involved private contracts, the statute involved was set aside. During Chief Justice White's term (1910 to 1921) the proportion of contract cases shrank to 15%, and in that of Chief Justice Taft, to 9%.[1734]

In recent years the clause has appeared to undergo something of a revival, not however as a protection of public grants, but as a protection of private credits. During the Depression, which began in 1929 and deepened in 1932, State legislatures enacted numerous moratorium statutes, and beginning with Home Loan a.s.sociation _v._ Blaisdell, which was decided in 1934, the Court was required to pa.s.s upon several of these. At the same time the clause was, in effect, treated by the Court in two important cases as interpretive of the due process clause, Amendment V, and thus applied indirectly as a restriction on the power of Congress.[1735] But this emergence of the clause into prominence was a flash in the pan. During the last decade hardly a case a term involving the clause has reached the Court, counting even those in which it is treated as a tail to the due process of law kite.[1736] The reason for this declension has been twofold: first, the subordination of public grants to the police power; secondly, the expansion of the due process clause, which has largely rendered it a fifth wheel to the Const.i.tutional Law coach.

Clause 2. No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

DUTIES ON EXPORTS AND IMPORTS

Scope

Only articles imported from or exported to a foreign country, or "a place over which the Const.i.tution has not extended its commands with respect to imports and their taxation," e.g., the Philippine Islands, are comprehended by the terms "imports" and "exports,"[1737] goods brought from another State are not affected by this section.[1738] To determine how long imported wares remain under the protection of this clause, the Supreme Court enunciated the original package doctrine in the leading case of Brown _v._ Maryland.[1739] "When the importer has so acted upon the thing imported," wrote Chief Justice Marshall, "that it has become incorporated and mixed up with the ma.s.s of property in the country, it has, perhaps, lost its distinctive character as an import, and has become subject to the taxing power of the State; but while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported, a tax upon it is too plainly a duty on imports, to escape the prohibition in the Const.i.tution."[1740] A box, case or bale in which separate parcels of goods have been placed by the foreign seller is regarded as the original package, and upon the opening of such container for the purpose of using the separate parcels, or of exposing them for sale, each parcel loses its character as an import and becomes subject to taxation as a part of the general ma.s.s of property in the State.[1741] Imports for manufacture cease to be such when the intended processing takes place,[1742] or when the original packages are broken.[1743] Where a manufacturer imports merchandise and stores it in his warehouse in the original packages, that merchandise does not lose its quality as an import, at least so long as it is not required to meet such immediate needs.[1744] The purchaser of imported goods is deemed to be the importer if he was the efficient cause of the importation, whether the t.i.tle to the goods vested in him at the time of s.h.i.+pment, or after its arrival in this country.[1745] A State franchise tax measured by properly apportioned gross receipts may be imposed upon a railroad company in respect of the company's receipts for services in handling imports and exports at its marine terminal.[1746]

Privilege Taxes

A State law requiring importers to take out a license to sell imported goods amounts to an indirect tax on imports and hence is unconst.i.tutional.[1747] Likewise, a franchise tax upon foreign corporations engaged in importing nitrate and selling it in the original packages,[1748] a tax on sales by brokers[1749] and auctioneers[1750]

of imported merchandise in original packages, and a tax on the sale of goods in foreign commerce consisting of an annual license fee plus a percentage of gross sales,[1751] have been held invalid. On the other hand, pilotage fees,[1752] a tax upon the gross sales of a purchaser from the importer,[1753] a license tax upon dealing in fish which, through processing, handling, and sale, have lost their distinctive character as imports,[1754] an annual license fee imposed on persons engaged in buying and selling foreign bills of exchange,[1755] and a tax upon the right of an alien to receive property as heir, legatee, or donee of a deceased person[1756] have been held not to be duties on imports or exports.

Property Taxes

Property brought into the United States from without is immune from _ad valorem_ taxation so long as it retains its character as an import,[1757] but the proceeds of the sale of imports, whether in the form of money or notes, may be taxed by a State.[1758] A property tax levied on warehouse receipts for whiskey exported to Germany was held unconst.i.tutional as a tax on exports.[1759]

Inspection Laws

Inspection laws "are confined to such particulars as, in the estimation of the legislature and according to the customs of trade, are deemed necessary to fit the inspected article for the market, by giving the purchaser public a.s.surance that the article is in that condition, and of that quality, which makes it merchantable and fit for use or consumption."[1760] In Turner _v._ Maryland[1761] the Supreme Court listed as recognized elements of inspection laws, the "quality of the article, form, capacity, dimensions, and weight of package, mode of putting up, and marking and branding of various kinds, * * *" .[1762] It sustained as an inspection law a charge for storage and inspection imposed upon every hogshead of tobacco grown in the State and intended for export, which the law required to be brought to a State warehouse to be inspected and branded. The Court has cited this section as a recognition of a general right of the States to pa.s.s inspection laws, and to bring, within their reach articles of interstate, as well as of foreign, commerce.[1763] But on the ground that, "it has never been regarded as within the legitimate scope of inspection laws to forbid trade in respect to any known article of commerce, irrespective of its condition and quality, merely on account of its intrinsic nature and the injurious consequences of its use or abuse," it held that a State law forbidding the importation of intoxicating liquors into the State could not be sustained as an inspection law.[1764] Since the adoption of the Twenty-first Amendment, such State legislation is valid whether cla.s.sified as an inspection law or not.

Clause 3. No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or s.h.i.+ps of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

TONNAGE DUTIES

The prohibition against tonnage duties embraces all taxes and duties, regardless of their name or form, whether measured by the tonnage of the vessel or not, which are in effect charges for the privilege of entering, trading in, or lying in a port.[1765] But it does not extend to charges made by State authority, even if graduated according to tonnage,[1766] for services rendered to the vessel, such as pilotage, towage, charges for loading and unloading cargoes, wharf.a.ge, or storage.[1767] For the purpose of determining wharf.a.ge charges, it is immaterial whether the wharf was built by the State, a munic.i.p.al corporation or an individual; where the wharf is owned by a city, the fact that the city realized a profit beyond the amount expended does not render the toll objectionable.[1768] The services of harbor masters for which fees are allowed must be actually rendered, and a law permitting harbor masters or port wardens to impose a fee in all cases is void.[1769] A State may not levy a tonnage duty to defray the expenses of its quarantine system,[1770] but it may exact a fixed fee for examination of all vessels pa.s.sing quarantine.[1771] A State license fee for ferrying on a navigable river is not a tonnage tax, but rather is a proper exercise of the police power, and the fact that a vessel is enrolled under federal law does not exempt it.[1772] In the State Tonnage Tax Cases,[1773] an annual tax on steamboats measured by their registered tonnage was held invalid despite the contention that it was a valid tax on the steamboat as property.

KEEPING TROOPS

This provision contemplates the use of the State's military power to put down an armed insurrection too strong to be controlled by civil authority;[1774] and the organization and maintenance of an active State militia is not a keeping of troops in time of peace within the prohibition of this clause.[1775]

INTERSTATE COMPACTS

Background of Clause

Except for the single limitation that the consent of Congress must be obtained, the original inherent sovereign rights of the States to make compacts with each other was not surrendered under the Const.i.tution.[1776] "The compact," as the Supreme Court has put it, "adapts to our Union of sovereign States the age-old treaty-making power of independent sovereign nations."[1777] In American history the compact technique can be traced back to the numerous controversies which arose over the ill-defined boundaries of the original colonies. These disputes were usually resolved by negotiation, with the resulting agreement subject to approval by the Crown.[1778] When the political ties with Britain were broken the Articles of Confederation provided for appeal to Congress in all disputes between two or more States over boundaries or "any cause whatever"[1779] and required the approval of Congress for any "treaty confederation or alliance" to which a State should be a party.[1780] The framers of the Const.i.tution went further. By the first clause of this section they laid down an unqualified prohibition against "any treaty, alliance or confederation"; and by the third clause they required the consent of Congress for "any agreement or compact." The significance of this distinction was pointed out by Chief Justice Taney in Holmes _v._ Jennison.[1781] "As these words ('agreement or compact') could not have been idly or superfluously used by the framers of the Const.i.tution, they cannot be construed to mean the same thing with the word treaty. They evidently mean something more, and were designed to make the prohibition more comprehensive. * * * The word 'agreement,'

does not necessarily import and direct any express stipulation; nor is it necessary that it should be in writing. If there is a verbal understanding, to which both parties have a.s.sented, and upon which both are acting, it is an 'agreement.' And the use of all of these terms, 'treaty,' 'agreement,' 'compact,' show that it was the intention of the framers of the Const.i.tution to use the broadest and most comprehensive terms; and that they anxiously desired to cut off all connection or communication between a State and a foreign power; and we shall fail to execute that evident intention, unless we give to the word 'agreement'

its most extended signification; and so apply it as to prohibit every agreement, written or verbal, formal or informal, positive or implied, by the mutual understanding of the parties."[1782] But in Virginia _v._ Tennessee,[1783] decided more than a half century later, the Court s.h.i.+fted position, holding that the unqualified prohibition of compacts and agreements between States without the consent of Congress did not apply to agreements concerning such minor matters as adjustments of boundaries, which have no tendency to increase the political powers of the contractant States or to encroach upon the just supremacy of the United States. This divergence of doctrine may conceivably have interesting consequences.[1784]