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ArtI.S10.C1.4.4.1 Early Cases on State Modifications to State 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.

Early in the nation’s history, the Supreme Court established that, in addition to barring a state from substantially interfering with contracts of private individuals, the Constitution’s Contract Clause may prohibit a state from breaching or modifying its own contracts. In fact, one of the first case in which the Supreme Court struck down a state law as unconstitutional arose under the Contract Clause, and involved contracts between the State of Georgia and private parties.1 In Fletcher v. Peck, Robert Fletcher sued John Peck, arguing, among other things, that Peck lacked clear title to a tract of land he had conveyed to Fletcher.2 The State of Georgia sold the tract to private parties in 1795 by an act of its legislature.3 However, a subsequent legislature, determining that corruption tainted the sale, passed a law purporting to rescind the earlier grant.4 This raised the question of whether Peck had title to the land he purported to convey to Fletcher.

Chief Justice John Marshall, writing for the Court, characterized Georgia’s original sale of land as a contract between Georgia and private parties that fell within the scope of the Contract Clause.5 Although the contract had already been executed, the grant of real estate continued to impose obligations on Georgia not to reassert title to the land.6 The Court interpreted the Contract Clause to prohibit a state from breaching its own contracts as well as impairing those between private individuals.7 Drawing a comparison between the act rescinding the land grant and an unconstitutional ex post facto state law that punished an individual for an act that was not a crime at the time it was committed, the Court determined that the Contract Clause prohibited the Georgia legislature from nullifying its earlier grant of land.8 The Court stated that subsequent purchasers of the land bought it without notice of the corrupt intent of the legislature that initially conveyed it, and, therefore, “the state of Georgia was restrained, either by general principles which are common to our free institutions, or by the particular provisions of the constitution of the United States, from passing a law whereby the estate of the plaintiff in the premises so purchased could be constitutionally and legally impaired and rendered null and void.” 9 The Court’s decision in Fletcher was an early indication that the Justices would closely scrutinize a state’s breach of its own contracts with private parties, and that grants of real estate could constitute contract rights protected by the Contract Clause.

Nine years later, in a seminal corporate law decision, the Supreme Court further extended its interpretation of the types of contracts and property interests protected by the Contract Clause, determining the Clause may prohibit states from revoking or substantially interfering with private corporate charters established under state law. In Trustees of Dartmouth College v. Woodward, the New Hampshire state legislature enacted a law amending the corporate charter of Dartmouth College, which King George III of Great Britain established in a 1769 grant.10 New Hampshire altered the charter to vest control of the College in the state’s governor and other state officials.11 The majority of the college’s trustees objected to this transfer of control of the College to the state and sued the secretary of the new board of trustees to recover corporate property transferred to the new secretary.12

The Court determined that Dartmouth’s corporate charter was a contract subject to the Contract Clause even though the Constitution’s Framers may not have contemplated the Clause would protect rights granted under a corporate charter.13 In support of this view, the Court focused on the law’s effects on the corporation’s property, noting the charter had been made for the “security and disposition of property” and that “real and personal estate ha[d] been conveyed to the corporation” to accomplish its mission of education.14 Donors gifted the College with money and property upon the expectation that its mission would be fulfilled by the trustees without interference by the state legislature.15

Having determined the trustees’ rights under the corporate charter were protected by the Contract Clause, the Court further decided that the New Hampshire law impaired these rights because, contrary to the will of the College’s donors, the legislation transferred the power of governing the College from the trustees appointed in the founder’s will to the New Hampshire governor and placed donor funds under the state government’s control.16 The College’s founders donated funds with the expectation that the charter would protect the objectives and governance structure of Dartmouth College for posterity.17 Furthermore, Dartmouth College was a private institution that held property for nongovernmental purposes; its professors and trustees were not public officers; and it was funded by private donors.18

Thus, even though the College was formed under state law, the Court determined it was not a civil institution, and thus the government had no right to change its governance structure and mission substantially without its consent.19 Moreover, the legislature had not reserved a right to amend the charter.20 Dartmouth College was a key decision with ramifications beyond the higher education context. The decision established constitutional limits on a state’s power to alter a corporation’s charter without its consent, at least when the state had not reserved a right to amend the charter.

See Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 127 (1810). back
See id. at 127–28. back
Id. at 127. back
Id. at 130–32. For more on the history of the so-called “Yazoo Land Fraud,” see Allen Pusey, The Yazoo Land Fraud Becomes Law, 104 A.B.A. J. 72 (2018). back
See Fletcher, 10 U.S. (6 Cranch) at 135, 137 ( “A grant, in its own nature, amounts to an extinguishment of the right of the grantor, and implies a contract not to reassert that right. A party is, therefore, always estopped by his own grant.” ). back
See id. at 136–37; cf. Texaco, Inc. v. Short, 454 U.S. 516, 518, 531 (1982) (upholding, against a Contract Clause challenge, an Indiana law that automatically extinguished severed mineral interests if they were not used for twenty years unless the mineral owner filed a statement of claim with the local county recorder because the mineral owners in the case had not executed mineral leases until after their mineral rights had lapsed, and thus there was no existing contract to be impaired). back
See Fletcher, 10 U.S. (6 Cranch) at 137. back
Id. at 136–39. back
Id. at 139. back
See 17 U.S. (4 Wheat.) 518, 624–26 (1819). After the Revolution, the State of New Hampshire succeeded to the duties and powers of government previously held by the Crown, including obligations to Dartmouth College created by the charter. See id. at 651. back
Id. at 626. back
Id. at 626–27. back
Id. at 627, 644–45. back
Id. at 643–44. back
See Id. at 647 ( “It is probable, that no man ever was, and that no man ever will be, the founder of a college, believing at the time, that an act of incorporation constitutes no security for the institution; believing, that it is immediately to be deemed a public institution, whose funds are to be governed and applied, not by the will of the donor, but by the will of the legislature.” ). back
Id. at 652. back
Id. at 652–54 ( “They contracted for a system, which should, as far as human foresight can provide, retain forever the government of the literary institution they had formed, in the hands of persons approved by themselves.” ). back
See id. at 629–36. back
See id. at 637–38 ( “There can be no reason for implying in a charter, given for a valuable consideration, a power which is not only not expressed, but is in direct contradiction to its express stipulations.” ). back
See id. at 674–75, 680 (Story, J., concurring). back