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Keeping up with the Contracts Clause: the Supreme Court's decision in Sveen v. Melin

posted by Melissa Jacoby

In June 2018, the U.S. Supreme Court decided Sveen v. Melin, a case applying Contracts Clause* jurisprudence to a state revocation-on-divorce statute and preexisting insurance contract. It isn't like the Supreme Court hears a Contracts Clause case every week, every term, or even every decade. Given its relevance to many Credit Slips topics, such as a financially distressed government unit without bankruptcy access or mortgage/foreclosure crises, it seems worth fostering a conversation about the case here.  

Unlike many key precedents, this case did not involve a "police power"/emergency justification for impairing existing contracts. A timeline: 

  • 1997: Sveen & Melin marry.
  • 1998: Sveen purchases a life insurance policy naming Melin as primary beneficiary and his children from a prior marriage as contingent beneficiaries (he has other policies naming them primary beneficiaries). 
  • 2002: The state of Minnesota enacts a statute that automatically revokes the designation of a spouse as the beneficiary upon the dissolution or annulment of the marriage. This is not an unusual statute, for better or worse; the statute comes from a uniform law project. The statute does not prevent the parties from agreeing to a different result and seeking to override the revocation. 
  • 2007: Sveen & Melin divorce.  
  • 2011: Sveen dies, leading to a dispute over who should receive the life insurance proceeds. As stated above, the policy names Melin. But, say Sveen's children, the 2002 law automatically revoked that designation when Sveen and Melin divorced. 

The Court of Appeals for the Eighth Circuit held that retroactive application of the 2002 statute to the 1998 policy violated the Contracts Clause. The Supreme Court reversed 8-1, with Justice Gorsuch dissenting. (For the perspective of a family law expert, I would recommend Professor Naomi Kahn's analysis.)  

The case did not bring about heightened Contracts Clause enforcement for which some hoped and advocated; the Court declined Melin's invitation to revisit the prevailing test for Contracts Clause violations. At least in this context, only Justice Gorsuch expressed an appetite for more rigorous Contracts Clause enforcement - or, stated conversely, making it easier for the Court to invalidate state laws on this basis. 

Adhering to the existing test, the majority decision reinforces that one needs more than an assertion of an impairment of an existing contract for a Contracts Clause violation. The impairment of a contractual relationship brought about by the state law must be substantial. Relevant to substantiality, says the court based on prior case law, are "the extent to which the law undermines the contractual bargain, interferes with a party's reasonable expectations, and prevents the party from safeguarding or reinstating his rights."

Even a substantial impairment may be valid if it has been drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose, says the court. In other words, the prevailing test requires consideration of policy justification. In this case, Professor James Ely's amicus brief supporting Melin calls the government's asserted interest justifying the revocation-on-divorce statute "astonishingly slight." An amicus brief of gender equality organizations, also supporting Melin, argued in depth that the Minnesota statute, as applied retroactively, cannot satisfy this element.  

The Supreme Court majority decision avoids dealing with the justification portion of the test, however, by resolving the case on substantiality: likening the law to a minimal paperwork burden upheld in prior cases, the 2002 state law's impairment of the 1998 insurance contract was not substantial, said the majority, and thus application of the law to this preexisting contract did not violate the Contracts Clause. For reasons not worth getting into here, I agree with many of Justice Gorsuch's critiques of the majority reasoning. An important takeaway, in any event, is that substantiality is itself contextual. The statute essentially negates the central element of an existing contract, yet that was not sufficient to establish substantiality - presumably because the statute leaves open the possibility of overriding the default rule, allowing a party to safeguard or reinstate rights? That makes me wonder about the range of inquiries that might be deemed relevant to substantiality as applied to, say, laws that change the right to debt repayment or retiree pension or health care obligations. 

--

*The Contracts Clause in Article I Section 10 of the U.S. Constitution provides "[n]o State shall... make any ... Law impairing the Obligation of Contracts..." 

 

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