15 March 2018

It's Back! SCOTUS to Consider the Contract Clause

Nice summary here of issues for today's oral argument.

You can find one of my favorite Constitutional provisions in Article I, section 10, clause 1: "No State shall pass any Law impairing the Obligation of Contracts." While I have posted on the Contract Clause a number of times (try here, here, and here for a sampling), it's been awhile. This gap explains why I was gratified to read this bit of news in Forbes. It turns out that SCOTUS has taken up a case on a writ of certiorari to the Eighth Circuit that presents what may be a case of a state law that runs afoul of the Contract Clause.

As explained in the article,
Mark Sveen and Kaye Melin were married in 1997 and lived in Minnesota. After their marriage, Sveen purchased a life insurance policy, naming Kaye as primary beneficiary and his children by a previous marriage as contingent beneficiaries. The couple divorced in 2007 and Sveen died in 2011. 
The trouble arose out of the fact that the state changed its probate code in 2002. The law now provided that life insurance beneficiary designations would be revoked upon divorce. After the divorce, Mark did not change the beneficiary designation, leaving Kaye listed as the primary beneficiary when he died. Naturally, both Kaye Melin and the Sveen children want the proceeds, the latter arguing that under the new Minnesota law, they are entitled to the money. Hence the suit.
That’s where the Contract Clause enters the picture. Did Minnesota violate it when it in effect rewrote existing life insurance contracts with its revocation-upon-divorce statute?
The Eighth Circuit ruled in favor of Kaye Melin, the beneficiary named in the policy, holding that the post-divorce Minnesota statute could not "impair" the obligation of the existing life insurance contract. The Sveen children have asked SCOTUS to reverse the appellate court citing a series of cases beginning in the 1930s in which the Court has permitted state law to tweak or defer collection of a variety of contracts.

So far I suspect many of many readers might be rooting for the ex-wife--next to only property, contracts are God's gifts to human society and no state should mess with 'em. But consider:

One group that will be watching this case closely is state and local government employees in California (and elsewhere) who through the 2000s convinced hapless state legislators and city governments to grant ever-greater retirement benefits. (Read some of the details in my article Municipal Bankruptcy: When Doing Less Is Doing Best (download here or here).) They are now fighting hard to keep the state from rolling back those unsustainable (here and here) benefits in the more austere decade since.

For what it's worth, I don't believe the Contract Clause prevents a state from modifying an existing contract unilaterally. Such a change may well be a breach of contract but it wouldn't impair the "Obligation" of contract as such. But I could be wrong so we'll have to wait and see.

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