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CRS Annotated Constitution

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Evaluation of the Clause Today.—It should not be inferred that the obligation of contracts clause is today totally moribund. Even prior to the most recent decisions, it still furnished 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 attitude toward insolvency laws, redemption laws, exemption laws, appraisement laws and the like, has always been that they may not be given retroactive operation,1984 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 & Loan Assn. v. Blaisdell,1985 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 asserting that these conditions had created an economic emergency calling for the exercise of the[p.396]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. Contemporaneously, however, less carefully drawn statutes from Missouri and Arkansas, acts which were not as considerate of creditor’s rights, were set aside as violative of the contracts clause.1986 “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 cumulative 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.”1987 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 dammed 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.”’1988

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.1989 “Mortgagees,” the Court said, “are constitutionally entitled to no more than payment in full. . . . To hold that mortgagees are entitled under the contract clause to retain the advantages of[p.397]a forced sale would be to dignify into a constitutionally 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.”1990

More important, the Court has been at pains most recently to reassert the vitality of the clause, although one may wonder whether application of the clause will be more than episodic.

“[T]he Contract Clause remains a part of our written Constitution.”1991 So saying, the Court struck down state legislation in two instances, one law involving the government’s own contractual obligation and the other affecting private contracts.1992 A finding that a contract has been “impaired” in some way is merely the preliminary step in evaluating the validity of the state action.1993 But in both cases the Court applied a stricter–than–usual scrutiny to the statutory action, in the public contracts case precisely because it was its own obligation that the State was attempting to avoid and in the private contract case, apparently, because the legislation was in aid of a “narrow class.”1994 The approach in any event is one of balancing. “The severity of the impairment measures the height of the hurdle the state legislation must clear. Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation.”1995 Having determined that a severe impairment had resulted in both cases,1996 the Court moved on to assess the justifica[p.398]tion for the state action. In United States Trust, the test utilized by the Court was that an impairment would be upheld only if it were “necessary” and “reasonable” to serve an important public purpose. But the two terms were given somewhat restrictive meanings. Necessity is shown only when the State’s objectives could not have been achieved through less dramatic modifications of the contract; reasonableness is a function of the extent to which alteration of the contract was prompted by circumstances unforeseen at the time of its formation. The repeal of the covenant in issue was found to fail both prongs of the test.1997 In Spannaus, the Court drew from its prior cases four standards: did the law deal with a broad generalized economic or social problem, did it operate in an area already subject to state regulation at the time the contractual obligations were entered into, did it effect simply a temporary alteration of the contractual relationship, and did the law operate upon a broad class of affected individuals or concerns. The Court found that the challenged law did not possess any of these attributes and thus struck it down.1998

Whether these two cases portend an active judicial review of economic regulatory activities, in contrast to the extreme deference shown such legislation under the due process and equal protection clauses, is problematical. Both cases contain language emphasizing the breadth of the police powers of government that may be used to further the public interest and admitting limited judicial scrutiny. Nevertheless, “[i]f the Contract Clause is to retain any meaning at all . . . it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power.”1999

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[p.399]Treasury of the United States; and all such Laws shall be subject to the Revision and Control of the Congress.

Duties on Exports or Imports

Scope.—Only articles imported from or exported to a foreign country, or “a place over which the Constitution has not extended its commands with respect to imports and their taxation,” are comprehended by the terms “imports” and “exports.”2000 With respect to exports, the exemption from taxation “attaches to the export and not to the article before its exportation,”2001 requiring an essentially factual inquiry into whether there have been acts of movement toward a final destination constituting sufficient entrance into the export stream as to invoke the protection of the clause.2002 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. “When the importer has so acted upon the thing imported,” wrote Chief Justice Marshall, “that it has become incorporated and mixed up with the mass 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 Constitution.”2003 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 loses its character as an import and becomes subject to taxation as a part of the general mass of property in the State.2004 Imports for manufacture cease to be such when the intended processing takes place,2005 or when the original packages are broken.2006 Where a manufacturer imports merchandise and stores it in his warehouse in the original[p.400]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.2007 The purchaser of imported goods is deemed to be the importer if he was the efficient cause of the importation, whether the title to the goods vested in him at the time of shipment, or after its arrival in this country.2008 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.2009


Footnotes

1984 See especially Edwards v. Kearzey, 96 U.S. 595 (1878); Barnitz v. Beverly, 163 U.S. 118 (1896).
1985 290 U.S. 398 (1934).
1986 W. B. Worthen Co. v. Thomas, 292 U.S. 426 (1934); W. B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935).
1987 Id., 62.
1988 East New York Bank v. Hahn, 326 U.S. 230, 235 (1945), quoting New York Legislative Document (1942), No. 45, p. 25.
1989 Honeyman v. Jacobs, 306 U.S. 539 (1939). See also Gelfert v. National City Bank, 313 U.S. 221 (1941).
1990 Id., 233–234.
1991 United States Trust Co. v. New Jersey, 431 U.S. 1, 16 (1977). “It is not a dead letter.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 241 (1978). A majority of the Court seems fully committed to using the clause. Only Justices Brennan, White, and Marshall dissented in both cases. Chief Justice Burger and Justices Rehnquist and Stevens joined both opinions of the Court. Of the three remaining Justices, who did not participate in one or the other case, Justice Blackmun wrote the opinion in United States Trust while Justice Stewart wrote the opinion in Spannaus and Justice Powell joined it.
1992 United States Trust involved a repeal of a covenant statutorily enacted to encourage persons to purchase New York–New Jersey Port Authority bonds by limiting the Authority’s ability to subsidize rail passenger transportation. Spannaus involved a statute requiring prescribed employers who had a qualified pension plan to provide funds sufficient to cover full pensions for all employees who had worked at least 10 years if the employer either terminated the plan or closed his offices in the State, a law that greatly altered the company’s liabilities under its contractual pension plan.
1993 431 U.S., 21; 438 U.S., 244.
1994 431 U.S., 22–26; 438 U.S., 248.
1995 438 U.S., 245.
1996 431 U.S., 17–21 (the Court was unsure of the value of the interest impaired but deemed it “an important security provision”); 438 U.S. 244–247 (statute mandated company to recalculate, and in one lump sum, contributions previously adequate).
1997 431 U.S., 25–32 (State could have modified the impairment to achieve its purposes without totally abandoning the covenant, though the Court reserved judgment whether lesser impairments would have been constitutional, id., 30 n. 28, and it had alternate means to achieve its purposes; the need for mass transportation was obvious when covenant was enacted and State could not claim that unforeseen circumstances had arisen.)
1998 438 U.S., 244–251. See also Exxon Corp. v. Eagerton, 462 U.S. 176 (1983) (emphasizing the first but relying on all but the third of these tests in upholding a prohibition on pass–through of an oil and gas severance tax).
1999 438 U.S., 242 (emphasis by Court).
2000 Hooeven & Allison Co. v. Evatt, 324 U.S. 652, 673 (1945). Goods brought from another State are not within the clause. Woodruff v. Parham, 8 Wall. (75 U.S.) 123 (1869).

Supplement: [P. 399, add to n.2000:]

Justice Thomas has called recently for reconsideration of Woodruff and the possible application of the clause to interstate imports and exports. Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 609, 621 (1997) (dissenting).

2001 Cornell v. Coyne, 192 U.S. 418, 427 (1904).
2002 Richfield Oil Corp. v. State Bd. of Equalization, 329 U.S. 69 (1946); Empress Siderurgica v. County of Merced, 337 U.S. 154 (1947); Kosydar v. National Cash Register Co., 417 U.S. 62 (1974).
2003 12 Wheat. (25 U.S.) 419, 441–442 (1827).
2004 May v. New Orleans, 178 U.S. 496, 502 (1900).
2005 Id., 501; Gulf Fisheries Co. v. MacInerney, 276 U.S. 124 (1928); McGoldrick v. Gulf Oil Corp., 309 U.S. 414 (1940).
2006 Low v. Austin, 13 Wall. (80 U.S.) 29 (1872); May v. New Orleans, 178 U.S. 496 (1900).
2007 Hooven & Allison Co. v. Evatt, 324 U.S. 652, 667 (1945). But see Limbach v. Hooven & Allison Co., 466 U.S. 353 (1984) (overruling the earlier decision).
2008 Id., 664.
2009 Canton R. Co. v. Rogan, 340 U.S. 511 (1951).
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