Topic: Fletcher v Peck, Dartmouth College v. Woodward, and the Contracts Clause

Introduction

Article II, Section 8 of the Constitution contains a list of subjects on which Congress may legislate. Among these enumerated powers are the Necessary and Proper Clause that we discussed in the last class and the Commerce Clause that we will discuss next class. Section 9 of Article I lists a number of things that Congress and the President are forbidden to do, such as Congress enacting ex post facto laws that criminalize behavior after the fact or the president suspending the writ of habeas corpus during peacetime. In fact, in response to the demand by several states during the ratification debates for a bill of rights, section 9 was pointed to by Hamilton (in Federalist 84) and other supporters of the Constitution as a bill of rights already within the Constitution. Their argument did not carry the day, but the section does list a number of limitations that the Constitution imposes on the national government.

Section 10 of Article I contains something one might not expect in a national constitution: a list of things the states are not permitted to do. Among this list is the Contracts (or Contract) Clause: No state shall pass any “Law impairing the Obligation of Contracts.” The sense of this prohibition becomes plain when we consider the chaotic financial conditions in the several states at the time the Philadelphia delegates convened. States would sometimes pass laws favoring debtors or creditors under existing debts and contracts. The Contracts Clause was intended to bar states from passing laws that would change the terms of private contracts. This guarantee of one’s rights under an existing contract amounts to an individual right or liberty. In the case of Sturgis v. Crowninshield (1819) the Court adhered to this common sense reading of the Clause and struck down a New York bankruptcy act that discharged the defendant from his obligation to pay his creditor a debt. In two prior cases, however, the Marshall Court construed the Clause more expansively: the Contracts Clause became a positive restriction on state governments in matters extending far beyond private contracts.

The two opinions of John Marshall that established this new constitutional doctrine are Fletcher v. Peck in 1810 and Dartmouth College v. Woodward in 1819. Though there are important legal distinctions between the two cases, they both clearly articulated the Marshall Court’s nationalist construction of the Contracts Clause. I chose to focus on Dartmouth College simply because of the excellent background story that is contained in the Garraty text.

In both of these cases, the focus of the constitutional challenges were state laws that changed the legal rights that individuals had received from earlier laws, not from private contracts. In Fletcher, the 1795 Georgia legislature had been bribed to the last man to enact a law offering land grants for some 35 million acres (the “Yazoo” land grants) at the extremely low price of about a penny and a half per acre. The purchasers—four well-connected land development companies—benefited tremendously from the grants. When the later Yazoo scam was discovered, the Georgia voters threw the bums out and elected a new legislature, which then repealed the land grant law. Though only a year passed between the two state enactments, the development companies had already sold some of the land to third parties. The repealer threatened to make the third parties’ titles to the land worthless. Since the Eleventh Amendment prevented them from suing Georgia directly, two of the out-of-state buyers of Yazoo lands concocted a federal lawsuit against each other that was aimed at challenging the constitutionality of the repealer.

In Dartmouth College, the college trustees who properly held office under the original royal college charter sought to challenge the constitutionality of a state law that replaced that charter with a new one and established Dartmouth University. The old trustees argued that their rights under the original charter were impaired by the later state law. They got into court by an unusual route—an action of trover to recover Dartmouth College documents that had been taken from the college by the newly chartered Dartmouth University secretary and treasurer, Woodward, who, the trustees said, had no lawful authority to take them. Again, the fundamental question in the case was whether the Contracts Clause applied to government-issued charters. (Trover is a legal action by a plaintiff to recover property or the value of property that has been wrongfully converted by the defendant.)

As you read the Dartmouth College opinion, try to identify the reasons that Marshall gave for considering a college charter to be a contract like any other. Did Marshall find the Dartmouth College corporation to be a “public” or a “private” corporation? What distinction did Marshall draw between the two? How did this opinion enhance national supremacy? The opinion is sometimes referred to as containing Marshall’s worst legal reasoning, but it is still considered by everyone a great case, leaving us to ponder how bad legal reasoning can constitute a great judicial event!

Part One: Dartmouth College, Fletcher, and the Contracts Clause

Let’s discuss the Fletcher case first. In Fletcher, the Court held that the Contracts Clause applies to government statutes that grant property rights to individuals: in other words, the state land grant statute was a contract! The Georgia statute that repealed the land grant statute was struck down because it destroyed the contractual rights that the earlier statute had created and vested in the original and subsequent buyers of the land. In other words, it impaired the obligations created by the original contract—namely, the land grant statute.

The opinion is important on several grounds. First, and most importantly for this course, Marshall treated a state land grant as a private contract and thus as subject to the Contracts Clause. In those days of territorial development, this ruling brought many common state statutes under national constitutional standards. It significantly limited the power of the states to alter or repeal such statutes. Second, the Court refused to base the validity of a state statute on the motives—here, the corrupt motives—of the members of the legislature. The Court held that the original statute, though a result of large scale bribery and corruption, was a valid land grant. This holding strengthened legislative authority in the states and in Congress: the reasons for passing laws could not be the basis for a challenge of the laws’ validity. What was done was done. And third, historically, the decision was immensely important during a period when government land grants were rapidly bringing territory into the possession of thousands of American settlers and land speculators. Buyers, sellers, and owners of land granted originally by state governments could rest easier that their legal right to land was secure.

The opinion thus contributed to the economic development of the country. The opinion also put the states in an awkward position, as Professor Urofsky points out. If a state legislature wanted to undo a fraudulent or ill-conceived act of a previous legislature, it had to maneuver around the Contracts Clause restriction on impairing property rights that had been created by the earlier legislation.

The Dartmouth College case was another exercise in expanding the meaning of “contract,” this time by construing certain corporate charters as contracts. In the late eighteenth and early nineteenth centuries, the potential of the medieval institution of the corporation as a device for economic and business development was still not widely recognized. Professor Urofsky points out that very few entrepreneurial business corporations existed during the Revolutionary period. Most were corporations formed to perform governmental tasks such as building bridges and roads and canals. Even by 1817, when Urofsky reports the number had “mushroomed” to almost 1800 corporations, most were still formed to perform public or governmental functions. In those days, and through much of the nineteenth century, each corporation was chartered by an act of the state legislature.

In an earlier case, Head and Amory v. Providence Insurance Company (1804), Marshall had defined corporations as “public” in nature, and as public corporations were essentially performing governmental tasks, they were subject to state management and control. Two subsequent opinions by Justice Story, Terrett v. Taylor and Town of Pawlett v. Clark (both decided in 1815), however, distinguished between public corporations and private corporations. (Story, a republican in politics—he was appointed to the Court by President Madison—but a fierce nationalist in his constitutional outlook, held that public corporations were subject to state control.) States could alter or revoke their charters. Private corporations were to be treated differently under the law and under the Constitution. In Terrett, which, like Town of Pawlett, was a case involving property acquired by an incorporated church, Story held the incorporated church was a private corporation. He held further that Virginia could not subsequently amend or revoke the corporate charter to nullify the church’s property holdings, and he rested that holding on “the principles of natural justice, upon the fundamental laws of every free government, upon the spirit and the letter of the constitution of the United States, and upon the decisions of most respectable judicial tribunals.” (Terrett v. Taylor, at 50-51.)

In Dartmouth College v. Woodward, Marshall had to maneuver around these earlier precedents written by Story and himself. Marshall first considered the definition of “contract.” He concluded that “contracts,” as addressed in the Contracts Clause of the Constitution, must be considered in the relatively narrow sense of “contracts respecting property.” He then discusses corporations, using the public-private distinction that Justice Story’s opinions had established in Terrett and Town of Pawlet. Marshall reasoned that the college was essentially a private corporation because it vested the trustees with property rights—the right to accept donations, to pay faculty, to purchase property. Marshall then closed the circle by finding that the charter for a private corporation was “plainly a contract.” Since the private funding of the college was one of the principal factors, if not the principal factor, in Marshall’s determination that the college was a private, not a public, corporation, the funding also led Marshall to the conclusion that as a college’s charter was essentially a contract respecting property and thus one that cannot be impaired by the state. The new charter granted by the state legislature had the effect of injuring or impairing the original contractual and property rights of the old trustees under the royal charter. Thus, the new corporate charter violated the Contracts Clause by impairing the contractual rights existing under the original charter. The effect of this opinion was to extend the scope of the Contracts Clause to prevent states from revoking or amending charters to private corporations in ways that affect the corporations’ property rights.

Dartmouth College marked the high water mark of the Court’s nationalistic interpretation of the Contracts Clause. Marshall’s and Story’s later attempts to restrict state authority to regulate private contracts were rejected by the Court in the Ogden v. Saunders case (1827), where the two justices were placed in the uncharacteristic position of dissenting. The nationalism of the Court began to wane in the last decade of Marshall’s reign. Still, the Court decision established the Clause as a significant restriction on state power in the nineteenth century. According to Nowak and Rotunda, the Court struck down thirty-nine state statutes between 1874 and 1898 under the Contracts Clause.

[Charles River Bridge case] [Preparation for Home Building and Loan]

The early twentieth century saw a decline in use of the Contracts Clause as the Court embarked on reviews of state regulation through it fabricated doctrine of substantive due process under the Fourth Amendment. The United States Trust Company and Allied Structural Steel Company cases in the 1970s, however, showed that there was still some life in the old clause. The Court declared state laws unconstitutional in both of these cases.

Of more immediate interest, perhaps, because of the various government attempts to aid the economy and particular its home-owner victims in the recent Great Recession of 2008 is a Great Depression case, Home Building and Loan v. Blaisdell (19334). In it, the Court addressed a Minnesota statute that sought to ease the financial obligations of home-owner-mortagors (the lenders are the “mortagees”) by expanding the redemption period for mortgagors who fell behind on their payments and were facing foreclosure. The case is also often used as an example of the Court’s position on the unwritten “emergency powers” of American governments during times of war or financial crisis.

Please read the excerpt from Home Building and Loan v. Blaisdell, and ask yourself whether Marshall and Story would have decided the case the same way. What was the Court’s reasoning on the Contracts Clause issue, and what rule did it apply in assessing the Minnesota statute’s constitutionality? Note that the decision was a close five-to-four vote. The dissent, which you can find in the full report of the case also linked (with other related cases) on the fourth class assignment page, may be of interest, too, in placing the issue in proper perspective. Justice Sutherland’s final paragraph is worth noting.

Part Two: Twentieth Century Developments