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Gorsuch Tries (Unsucessfully) To Restore the Contract Clause

On a happy note, for the first time in my academic career, an article that I wrote (with Douglas Kmiec) was quoted in a Supreme Court opinion. On a less happy one, it seems to have persuaded only a single justice. Thank you, Neil Gorsuch!

The case in question was Sveen v. Melin and the issue was whether the Minnesota law’s provision to wipe out a spouse as a contractual beneficiary in a life insurance policy after a divorce violates the Contract Clause. It is not a case that will garner many headlines, but an important constitutional liberty is at stake—the right to contract.

The Contract Clause provides that “No State shall impair the obligation of Contracts.” For the first hundred years of the Supreme Court, it was the most litigated provision of our fundamental law. And the Court enforced it quite strictly against state laws that retrospectively interfered with contractual obligation. (Chief Justice John Marshall even argued it applied to prospectively changing contract law, but lost to a majority opinion, written by Justice Joseph Story. It was the only major case in which these two great justices disagreed.)

But with the rise of progressive jurisprudence the Contract Clause has become a shadow of its former self. In Home Building and Loan Association v. Blaisdell, the Supreme Court permitted Minnesota to suspend foreclosures authorized by a mortgage contract. As Justice George Sutherland wrote in dissent, not only was that contrary to the language of the Clause, but the kind of debt relief at issue was actually the motivation for the prohibition.  There is no serious argument that this economic liberty protected was not in the text of the Constitution.

Ever since, the Contract Clause has functioned as a platform for the Court to balance interests as it sees fit rather than to enforce a strict rule against impairments. And Sveen is another in the long line of such discretionary balancing. The main import of the majority opinion is that many people forget to change the beneficiary after divorce, and the legislature is helpfully protecting them. In any event, according to the majority, those who want to keep their ex-spouses as beneficiaries can write them back in. Thus, the impairment is both insubstantial and reasonable.

But the language of the Contracts Clause does not exempt “reasonable” or “insubstantial” impairments from its strictures. For good reason. A contract protects individual rights of those under its regime, and what is reasonable and insubstantial for one individual may not be for another. Most people no doubt would be happy with this law, even those who signed such life insurance contracts. But, as Gorsuch implies, the Contract Clause protects the contractual rights of everyone, including those who would not know enough to write their ex-spouses back in as beneficiaries.

To be sure, the state has some paternalistic reasons in support of this law, but they do not rise to the compelling level generally required by the Court to trump a constitutional right.  Unless there is some basis in original meaning, our rule of law should no more play favorites with rights than it should play favorites with persons.

Reader Discussion

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on June 12, 2018 at 09:21:42 am

Congratulations! http://www.libertylawsite.org/book-review/desiccated-by-judicial-dereliction/

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Mark Pulliam
on June 12, 2018 at 11:26:35 am

Congratulations; I think it was last term that Prof. Rappaport was quoted in a Thomas opinion - these citations are the best testament to the caliber of the contributors at LLS.

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Paul Binotto
on June 12, 2018 at 12:32:46 pm

Paul, thanks for remembering -- I should note that I too was cited in the recent Contract Clause opinion.

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Mike Rappaport
on June 12, 2018 at 12:39:27 pm

Nice - In that case, congratulations to you, too!

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Paul Binotto
on June 12, 2018 at 13:44:18 pm

Congrats to McGinnis and Rappaport; that’s a fine honor.

That said--without having read either the majority or dissenting opinion on Sveen, I can’t make sense of McGinnis's argument.

Most people no doubt would be happy with this law, even those who signed such life insurance contracts. But, as Gorsuch implies, the Contract Clause protects the contractual rights of everyone, including those who would not know enough to write their ex-spouses back in as beneficiaries.

1. Why should the Contract Clause favor the rights of some tiny minority of people “who would not know enough to write their ex-spouses back in as beneficiaries,” but not the rights of the majority who would not know enough to designate a beneficiary by relationship as spouse, rather than by name?

This leads to the question: What makes contracts desirable? Arguably they are desirable as a way to bind two (or more) parties to their mutual intentions. Indeed, at one time courts required a “meeting of minds,” and would void an otherwise valid contract if it became clear that the parties failed to reach agreement in substance, even if they had reached agreement in terms. While this theory of contract has fallen out of favor, I wonder which theory prevailed in 1789?

In short, why vindicate a contrast's terms if the best evidence indicates that the bare terms fail to express the intentions of any party to the contract?

2. Does McGinnis also oppose the Uniform Commercial Code? That code creates a collection of default contract terms designed to reflect what is believed to be common intentions among commercial parties. Parties are free to specifically contract around those terms, but if they don’t—either intentionally or due to neglect—the standard terms apply.

The Minnesota law is basically another kind of standard term imputed into insurance contracts. The law does not contradict the terms of the policy; rather, it inserts an unstated clause, “If the beneficiary is my spouse, the designation shall endure so long as the beneficiary’s status as my spouse endures.”

Moreover, various contract doctrines—business practice, trade usage, course of dealing—permit contracts to be conformed to the parties’ intentions, even without express language dictating that result. Does McGinnis regard these doctrines as unconstitutional as well?

3. Finally—

In Home Building and Loan Association v. Blaisdell, the Supreme Court permitted Minnesota to suspend foreclosures authorized by a mortgage contract. As Justice George Sutherland wrote in dissent, not only was that contrary to the language of the Clause, but the kind of debt relief at issue was actually the motivation for the prohibition. There is no serious argument that this economic liberty protected was not in the text of the Constitution.

Great—so the Constitution was designed to forbid government tampering with contract terms that reflect mutual obligations. So let’s say that Blaisdell was wrong wrong bad bad.

Likewise, if a decedent and an ex-spouse had negotiated some kind of mutual obligation over the terms of a life insurance policy (say, as part of a property settlement in a divorce, then I expect a court might grant the ex-spouse some relief. (Or maybe not; not my area of expertise.) But are those the facts of Sveen?

But if instead the ex-spouse is not a contracting party, but rather is a third-party beneficiary, then Southerland’s rationale has no bearing on the case.

In sum, Gorsuch argues that the Constitution makes a fetish of contract language, even under circumstances when common experience (and the legislature) recognize that people will say things that conflict with their intentions, and even when vindicating this fetish will subordinate the interests of a decedents’ natural affections to the interests of bystanders. I’m not surprised that this argument didn’t attract more than one vote; I’m astonished it attracted any.

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nobody.really
on June 12, 2018 at 15:34:32 pm

Imagine a recording artist contracts to provide an album of music: "Artist shall provide the completed album by June 1, but the recording company ain't got no grounds to sue if the album is completed pretty close to that time." The artist completes the album by June 2. Could the recording company sue, on the theory that "ain't no" is a double negative, thereby indicating by inextricable logic that the company DID have grounds to sue under the contract?

If a court could recognize that common usage indicates that "ain't no" should NOT be construed as a double negative, why could a court not recognize that the designation of a spouse in an insurance policy is contingent upon the spouse remaining a spouse?

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nobody.really
on June 12, 2018 at 16:08:40 pm

"[W]hy could a court not recognize that the designation of a spouse in an insurance policy is contingent upon the spouse remaining a spouse?" - why would the SSA recognize that a divorced spouse, if the marriage lasted at least ten years, qualify to receive social security benefits on their ex-spouse's record (even if the ex-spouse has remarried), under certain circumstances, when they are no longer spouses?

Hint: because the U.S. Government has a pre-existing contract with the qualifying citizen and a policy interest in honoring the benefit claim. The broader policy and constitutional issues aside, could a state legislate an impairment of this contractual duty because the ex-spouse isn't likely to want his/her SSA benefit to go the divorced spouse?

https://www.ssa.gov/planners/retire/divspouse.html

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Paul Binotto
on June 12, 2018 at 17:32:43 pm

I'm not sure which side of the argument this point advances.

First, it's far from clear to me that Social Security is a contract. As far as I know, the feds could cancel it tomorrow, and nobody would have a legal claim against 'em. That said, I think the 1st Circuit concluded that public employee pensions are basically just gifts offered or withheld at the government's whim--EXCEPT for the portion characterized as "employee contribution." So, by analogy, maybe courts would find that people have a property interest in the portion of FICA taxes characterized as employee contribution. (As a matter of economics, all aspects of compensation for labor are "employee contributions," so this rationale struck me as a curious exercise in formalism. )

But second, if we did regard SS a contract, what significance should we attach to the fact that government's policies discriminate between marriages that last 10 years or less and marriages that last longer than 10 years? If we recognize that the Constitution does not forbid a legislature from exercising its judgment in fashioning policies governing the allocation of payments arising from the SS "contract," why would we not also recognize that the Minnesota legislature can do likewise regarding life insurance?

Third, here's a pretty clear distinction: In the 1930s Congress wanted to compel savings for old age. At that time, a relatively large share of women did not have their own earnings; instead forming a partnership with a husband wherein the woman provided domestic labor and the man provided market labor. Lacking a vehicle to accrue a share of the returns for domestic labor, the SSA simply taxed the husband's income as a vehicle to tax the wife's. And, by and large, the feds did not give people the choice about whether to pay into Social Security.

In contrast, private life insurance is not mandated, federally or otherwise. Thus, it becomes hard to make a credible case that government regards the allocation of life insurance proceeds as a matter of public policy, but regards the EXISTENCE of that insurance policy purely as a matter of discretion. Where government DOES value a public policy, it knows how to implement one. Exhibit A: Social Security.

Fourth, does Social Security conclude that if a marriage lasted for more than 10 years, the first wife collects ALL the benefits to the detriment of the second wife, regardless of how long the second marriage lasted? 'Cuz that's my understanding of the outcome Gorsuch espouses. Hard to see the policy rationale for that.

Finally, it is unclear to me that Gorsuch limited his Contract Clause rationale to only insurance policies. Thus, even if we agreed that it would be good public policy to permit an ex to collect on life insurance policies, I don't see how we get from that point to a general argument about the Contract Clause.

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nobody.really
on June 12, 2018 at 18:12:54 pm

Congratulations, Mike!

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Mark Pulliam
on June 12, 2018 at 18:23:33 pm

Hmmm, interesting points.

I think a good case can be made that SSI is a contract with citizens, indeed, the constitution is a contract.

"[T}he fact that government’s policies discriminate between marriages that last 10 years or less and marriages that last longer than 10 years?" - minor point, its between, "under 10 years" and "10 year or more".

"If we recognize that the Constitution does not forbid a legislature from exercising its judgment in fashioning policies governing the allocation of payments arising from the SS “contract,” why would we not also recognize that the Minnesota legislature can do likewise regarding life insurance? " - for one, because Minnesota is not a party to either of these contracts. Also, because the Supremacy Clause in the Constitution would prevail just as the Commerce Clause in the Constitution (should) prevail in Sveen.

" In the 1930s " - the divorce rate in 1935 was approx. 17%, significantly lower than it is today - compelling enough policy consideration - hmm, perhaps.

"Cuz that’s my understanding of the outcome Gorsuch espouses. Hard to see the policy rationale for that" - Naa, Gorsuch espouses, "No State shall impair the obligation of Contracts.” The outcome is merely consequencial (unfortunate perhaps) to the pre-existing contract and the constitutional protection of it. Besides, that's not the facts of this case, as this case is between the deceased's childern and his ex-wife, no subsequent wife, it appears.

"Thus, it becomes hard to make a credible case that government regards the allocation of life insurance proceeds as a matter of public policy, but regards the EXISTENCE of that insurance policy purely as a matter of discretion. " - Precisely, therefore, the state has no compelling interest in NOT permitting the contract to be enforced according to its original and unrevised conditions. AND, every compelling interest in vindicating the Commerce Clause.

"Finally, it is unclear to me that Gorsuch limited his Contract Clause rationale to only insurance policies." - I'm quite sure he did not limit it to only insurance policies, he limited his rationale to following the Constitution, that is the only rationale and general argument that needs to be made. "Until the Commerce Clause is repealed by amendment, it is and remains the law of the land, case closed, call me a cab, I'm late for the theatre".

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Paul Binotto
on June 12, 2018 at 18:26:59 pm

"Supremacy Clause in the Constitution would prevail " - if state tried to fashion policy affecting allocation of SSI, that is.

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Paul Binotto
on June 16, 2018 at 11:34:43 am

I just wonder if this will pave the way for States to nullify contracts-of any kind-that they find objectionable, like union contracts with State employees.

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Edward Sanchez

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