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ArtI.S10.C1.6.5.1 Early Cases on State Changes to Private Contracts

Article I, Section 10, Clause 1:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

The Supreme Court has long held that the Contract Clause limits a state’s power to regulate contracts between private parties. In the 1819 case Sturges v. Crowninshield, the Court examined a New York bankruptcy law that allowed insolvent debtors to obtain the discharge of their debts by surrendering their property.1 Notably, the law applied retroactively to debt contracts parties had entered into prior to its enactment, raising the question of whether it interfered with existing contracts in violation of the Contract Clause.2

The Supreme Court began its analysis by defining a “contract” for purposes of the Clause as “an agreement in which a party undertakes to do, or not to do, a particular thing.” 3 In the Court’s view, the “obligation” of the contract in Sturges was the underlying state law binding the defendant-debtor to pay the plaintiff-creditor money on or before a certain date in accordance with a promissory note’s terms.4 When New York enacted a law allowing debtors to obtain the discharge of their entire debts upon surrender of their property, the state impaired the obligation of the debt contracts by potentially limiting a debtor’s liability to an amount less than provided for in the original contract.5

Having determined the New York law impaired the obligation of contracts, the Court turned next to an analysis of whether that impairment violated the Contract Clause.6 The Court adopted a broad reading of the Clause that arguably extended beyond the Framers’ original understanding of its scope to encompass state bankruptcy laws.7 To the extent the New York law operated retroactively, the Court found, it impaired the obligation of contracts in violation of the Constitution.8

Nearly a decade after its decision in Sturges, the Court addressed a question left unanswered in that case—that is, whether a state bankruptcy law that permits a debtor to obtain a discharge from liability under a contract entered into after the passage of the law impairs the obligations of that contract in violation of the Contract Clause.9 In Ogden v. Saunders, a citizen of New York contracted a debt in that state and claimed to have been discharged from that debt under a bankruptcy law in force at the time he entered into the contract.10

As in Sturges, the Supreme Court began its analysis by defining the obligation of contracts as the state law that binds parties to contracts to perform their duties thereunder or, alternatively, to pay compensation.11 Unless the parties agreed otherwise, such law became part of the contract and governed enforcement of parties’ obligations before any tribunal, as well as the contract’s validity, construction, and discharge.12 As a result, a bankruptcy law that discharged a party from a contract made under the law of that state was part of the contract’s terms and conditions and discharged the obligation in all other tribunals.13 Such a law could not be said to impair that contract, the Court held, so long as it applied to future contracts rather than existing contracts.14 The Ogden decision thus drew a distinction between state laws that impaired obligations of contracts already in existence at the time of enactment and laws that affected future contracts, deeming the former to be more problematic from a constitutional standpoint.

Following its decision in Ogden, the Supreme Court decided cases in the 1800s that often adopted a broad view of the Contract Clause’s protections for both public and private contracts.15 But, as noted, by the end of the nineteenth century, the Contract Clause diminished in importance with the ratification of the Fourteenth Amendment and the imposition of limits on state power in the Amendment’s Due Process Clause.16 And during the early twentieth century, the Court further reduced the Contract Clause’s protections, specifically holding that “private agreements as well as public contracts were subject to the police power.” 17

17 U.S. (4 Wheat.) 122, 197, 208 (1819). back
See id. at 197. The Court determined that Article I, Section 10 of the Constitution did not necessarily prohibit states from passing bankruptcy laws so long as those laws did not conflict with federal law. Id. at 196–97. back
Id. at 197. back
Id. back
See id. at 197–98. back
See id. at 204. back
See id. at 204–05 ( “It seems scarcely possible to suppose that the framers of the constitution, if intending to prohibit only laws authorizing the payment of debts by instalment, would have expressed that intention by saying ‘no State shall pass any law impairing the obligation of contracts.’” ). back
Id. at 208. back
Ogden v. Saunders, 25 U.S. (12 Wheat.) 213, 254 (1827). back
Id. at 255–56. back
Id. at 257–59. The Court distinguished between a law that impairs a contract and a law that impairs a contractual obligation. Id. at 256–57. A law that impairs the contract itself “enlarges, abridges, or in any manner changes” the intention of the contracting parties by modifying the contract’s validity or “the construction, the duration, the mode of discharge, or the evidence of the agreement.” Id. back
Id. at 257–59. back
Id. at 260. back
Id. at 262–64 ( “[A] bankrupt law, which operates prospectively, or in so far as it does so operate, does not violate the constitution of the United States.” ). back
See, e.g., Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.) 535, 550–55 (1867); Cook v. Moffat, 46 U.S. (5 How.) 295, 308–09 (1847); Green v. Biddle, 21 U.S. (8 Wheat.) 1, 84, 91–93 (1823). But see Stone v. Mississippi, 101 U.S. (11 Otto) 814, 819–21 (1880). back
James W. Ely, Jr., The Contract Clause: A Constitutional History 5 (2016) ( “Although both federal and state courts heard a steady stream of contract clause cases [during the late nineteenth century], they increasingly relied on other constitutional provisions, notably the due process clause of the Fourteenth Amendment, to protect economic rights.” ). back
Id. at 5–6. back