Nahmod Law

The Contracts Clause

The Contracts Clause, U.S. Const. Art I, § 10, provides: “No State shall … pass any … Law Impairing the Obligation of Contracts.”

The Supreme Court has developed a three-part Contracts Clause test: (1) does the state law operate as a substantial impairment of the contractual relationship; (2) if so, does the state have a significant, legitimate public purpose behind the regulation; and (3), if so, is the adjustment of the rights and responsibilities of the contracting parties based on reasonable conditions and is it appropriate to the public purposes justifying the state regulation? See, generally, Energy Reserves Group, Inc. v. Kansas Power and Light Co., 459 U.S. 400 (1983).

As I noted in previous posts, there is a split in the circuits on whether Contracts Clause violations are actionable under section 1983. See https://nahmodlaw.com/2021/09/14/the-third-circuit-punts-on-whether-contracts-clause-violations-are-actionable-under-section-1983/

The Second Circuit has now joined those circuits–the Seventh and Ninth–ruling that the answer is yes. (The Fourth and Sixth Circuits have ruled the other way).

The Melendez Decision

In Melendez v. City of New York, 16 F.4th 992 (2nd Cir. 2021), the plaintiff landlords sued a city and city officials under section 1983 for prospective relief alleging, among other claims, violations of the Contracts Clause arising out of the city’s enactment during the Covid-19 pandemic of the Guaranty Law (the “Law”) rendering permanently unenforceable personal liability guarantees of commercial lease obligations arising between March 7, 2020 and June 30, 2021.

Reversing the district court, the Second Circuit ruled in a thoughtful and lengthy opinion evaluating Supreme Court precedent that this claim was improperly dismissed. It agreed with the district court that the Law substantially impaired plaintiffs’ commercial leases but disagreed that the Law was appropriate and reasonable to advance a significant and legitimate public purpose. Among other considerations, the Law did not merely defer guaranty obligations but permanently and entirely extinguished them. In addition, the Law did not “condition the relief it affords on guarantors owning shuttered businesses or, even if they do, on their ever reopening those businesses.” .

Judge Carney concurred in the result in part and dissented in part in an equally thoughtful and lengthy opinion, disagreeing with the majority on the Contracts Clause claim and arguing for a more deferential standard.

Comment

As I have argued, the better view is that Contracts Clause violations are indeed actionable under section 1983.

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