Hanauer v. Republic Building Co.

255 N.W. 136, 216 Wis. 49, 1934 Wisc. LEXIS 263

• Court: Wisconsin Supreme Court
• Decided: October 9, 1934
• Status: Published

Opinions

The following opinion was filed June 5, 1934:

Wickhem, J.

The sole question for determination upon this appeal is the constitutionality of sec. 269.58, Stats. Plaintiff contends that this section is repugnant to sec. 10, art. I, of the United States constitution, prohibiting the enactment by any state of a law impairing the obligation of contracts. This conclusion is asserted to follow by reason of the postponement until the completion of foreclosure proceedings of the right of plaintiff to sue at law upon the bonds. This is contended to impair valuable rights of the plaintiff under his contract. It is asserted that the law destroys the negotiability of these bonds by making the date, of payment, as well as the fact of ultimate payment, uncertain. The section has, of course, no effect whatever upon the formal negotiability of the bonds, since this is determined by the provisions of the bonds and not by the operation of legal remedies. The gist of plaintiff’s contention is that the section impairs the marketability of the bonds, and that to this extent it impairs the value of the contract.

At the outset it should be stated that we are concerned with the validity of this act as applied to one of numerous bonds secured by a trust deed. These bonds are widely held by different persons. They are negotiable, merely containing a reference to the trust deed, similar to that contained in the bonds dealt with by this court in Pollard v. Tobin, 211 Wis. 405, 247 N. W. 453. An- examination of the trust deed discloses no limitation upon the right of the bondholders to sue at law upon the bonds or coupons. Hence this case is not affected by the rule in Oster v. Buildings Development Co. 213 Wis. 481, 252 N. W. 168. The trust deed vests in the trustees, and under certain conditions, in a majority in amount of the bondholders, full rights to move for the foreclosure of the security. The owner of a particular bond, except as he may be able to induce the trustee to act, or except as he may act as one of a majority of the bondholders, has literally no control over the cause of action for foreclosure. The mortgagee of a mortgage secured by a single note has a free choice of remedies, and if he elects, may sue to foreclose the mortgage and in that action secure a deficiency judgment based upon the note. Such a mortgagee has two remedies upon the promissory note: (1) The ordinary action at law, and (2) the foreclosure proceedings in which he may have judgment for the entire debt reduced by whatever sum the foreclosure sale produces. In the case of the bondholder situated as is plaintiff, except for the operation of sec. 269.58, there are likewise two remedies upon the bond, but the bondholder has virtually no control over the remedy of foreclosure. Thus in fact the operation of sec. 269.58 is to postpone indefinitely the only remedy over which plaintiff has any substantial degree of control. Whatever legal materiality this may have, it certainly represents a factual distinction that should be observed and considered. Since the law clearly applies to persons situated as was the plaintiff, and since there is no possibility of severance, its validity must depend upon its effect on plaintiff’s contract rather than upon the contracts of those who have full control and a free choice of remedies.

Since the section under consideration is simply one of several acts constituting emergency moratoria, and since the supreme court of the United States, in Home Building & Loan Asso. v. Blaisdell, 290 U. S. 398, 54 Sup. Ct. 231, has so recently passed upon this subject, and so exhaustively dealt with the scope of the contract clause and its relation to the police power, this opinion may well begin with an analysis of that case. The court there recognized the rule that the police power is limited by express prohibitions contained in the constitution. This conclusion made necessary an inquiry into the scope of the prohibition in the contract clause. The court held that this clause was not to receive a literal interpretation, and that the fact that a statute impairs the obligation of a contract does not inevitably mean that the enactment is thereby rendered void. It is stated in the Blaisdell Case: “Not only is the constitutional provision qualified by the measure of control which the state retains over remedial processes, but the state also continues to possess authority to safeguard the vital interests of its people. It does not matter that legislation appropriate to that end ‘has the result of modifying or abrogating contracts already in effect.’ ” Citing Stephenson v. Binford, 287 U. S. 251, 53 Sup. Ct. 181. It is also stated that “the policy of protecting.contracts against impairment presupposes the maintenance of a government by virtue of which contractual relations are worth while.” It is further said that “the legislature cannot ‘bargain away the public health or the public morals,’ ” and that “the economic interests of the state may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts.” The court then states : “The question is not whether the legislative action affects contracts incidentally, or directly or indirectly, but whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end.”

Prior to the Blaisdell Case there had existed a rather nebulous distinction between procedural statutes which impair and those which do not impair the obligation of contracts. In Sturges v. Crowninshield, 4 Wheat. 122, 200, the court said:

“The distinction between the obligation of a contract, and the remedy given by the legislature to enforce that obligation, has been taken at the bar, and exists in the nature of things. Without impairing the obligation of the contract, the remedy may certainly be modified as the wisdom of the nation shall direct.”

However, in Von Hoffman v. Quincy, 4 Wall. 535, the court said:

“Nothing can be more material to the obligation than the means of enforcement. . . . The ideas of validity and remedy are inseparable, ■ and both are parts of the obligation, which is guaranteed by the constitution against invasion.” '

These two positions seem clearly to state contrary rules of law, but it is pointed, out in the Blaisdell Case that the broad language in the Von Hoffman Case must not be taken too literally, and that in the same case the rule is stated that “it is competent for the states to change the form of the remedy, or to modify it otherwise, as they may see fit, provided no substantial right secured by the contract is thereby impaired.”

In Conley v. Barton, 260 U. S. 677, 43 Sup. Ct. 238, the court said:

“It is recognized that the legislature may modify or change existing remedies or prescribe new modes of procedure without impairing the obligation of contracts if a substantial or efficacious remedy remains or is given, by means of which a. party can enforce his rights under the contract.”

To the same effect, see Oshkosh Waterworks Co. v. Oshkosh, 187 U. S. 437, 23 Sup. Ct. 234, where it is said:

“It is true the legislature may not withdraw all remedies, and thus, in effect, destroy the contract; nor may it impose such new restrictions or conditions as would materially delay or embarrass the enforcement of rights under the contract according to the usual course of justice as established when the contract was made. Neither could be done without impairing the obligation of the contract.”

The Wisconsin decisions are to the same effect. See Von Baumbach v. Bade, 9 Wis. *559, in which it was held that a statute extending the time to answer in a foreclosure action from twenty days to six months, was a mere change in remedy. Also Lightfoot v. Cole, 1 Wis. *26, in which the court stated that it was “within the power of the legislature to repeal, amend, change, or modify the laws governing proceedings in court, both as to past and future contracts, so that they leave the parties a substantial remedy according to the course of justice as it existed at the time the contract was made.”

In Northwestern Mut. L. Ins. Co. v. Neeves, 46 Wis. 147, 49 N. W. 832, the statute substituted a new procedure for the foreclosure of mortgages. Under the new procedure, instead of an immediate personal judgment, to be followed by an immediate sale subject to one year’s redemption, provision was made for a judgment postponing the sale for one year and allowing a personal judgment for the deficiency ascertained after the sale. This was held to be a mere regulation of remedy and not an impairment of the obligation of contract.

In Pawlowski v. Eskofski, 209 Wis. 189, 244 N. W. 611, this court said:

“If a statute substantially lessens the value of a pre-exist-ing contract the constitutional provision bars application of it to the contract. Many decisions of the supreme court of the United States have so held. This was held as far back as 6 Howard, where it is said in Planters’ Bank v. Sharp (p, 327) :

“ 'One of the tests that a contract has been impaired is that its value has by legislation been diminished. It is not, by the constitution, to be impaired at all. This is not a question of degree or manner or cause, but of encroaching in any respect on its obligation, dispensing with any part of its force.’ ”

It would seem, under the decision in the Blaisdell Case, that the fact that a statute purports to deal with a remedy has no longer any materiality, except in determining whether the statute is addressed to a legitimate end and is appropriate to that end. Certainly it must at least be said that a statute having other than procedural objectives cannot be sustained merely because it expressly deals with the subject-matter in terms of remedy, if it could not be sustained in a more direct form. Sec. 269.58 is not procedural in objective. It forms a part of a scheme of moratory legislation enacted for the purpose of alleviating conditions produced by the depression. The legislative intent and purpose are plain. Sec. 278.106 confers upon courts of equity the power, in their discretion, to extend the period of redemption in foreclosure proceedings, provided interest or taxes, or both, are paid by the mortgagor during the extended period. Sec. 269.58 was intended to compel mortgagees to seek their remedy through an action of foreclosure, and thus to subject themselves to the provisions of sec. 278.106. It was not enacted for the purpose of relieving the burdens of courts, or to promote the economical administration of justice.

The validity of the statute must be determined by its effect upon contracts such as plaintiff’s, and if it is found to impair them, the tests of the Blaisdell Case must be applied. That plaintiff’s contract has in fact been seriously impaired in value by the indefinite postponement of the remedy at law for its enforcement is not open to doubt. That this is the only remedy which plaintiff may freely pursue and over which plaintiff has any substantial degree of control must also be taken as established. These conclusions having been reached, it becomes proper to apply the formula of the Blais-dell Case to determine the validity of the enactment.

Is the legislation directed to a legitimate end? Certainly the Blaisdell Case has decided that it is, and there would seem to be no reasonable ground to differ with this conclusion. The suffering, hardship, and calamitous consequences of the depression are known to every one, are judicially noticed by the courts, and require no extended description here. That such enactments were designed to alleviate these conditions, and that such an objective is legitimate, would hardly seem open to debate.

Is the legislation reasonably appropriate to this end? In answering this question the rule of Home Building & Loan Asso. v. Blaisdell, supra, requires in each case a balancing of social needs against the individual rights claimed to be impaired. The greater the public exigency, the greater will be the degree of impairment found to be reasonable and hence permissible. It is the relation between these two facts that must always be considered. To state that an emergency exists is merely another way of stating the existence of a great and pressing public need. To say that an emergency creates the occasion for a greater exercise of the police power with respect to contracts, is merely to state that a greater degree of impairment is permissible when the pressure of the social need is great. It follows that the question in each case must ordinarily be solved by a consideration of the facts and circumstances of that case. It is all a matter of degree. The court, in Pennsylvania Coal Co. v. Mahon, 260 U. S. 393, 413, 43 Sup. Ct. 158, speaking through Mr. Justice Holmes, and referring to the scope of the police power, said:

“But obviously the implied limitation must have its limits, or the contract and due process clauses are gone. One fact for consideration in determining such limits is the extent of the diminution. When it reaches a certain magnitude, in most if not in 'all cases there must be an exercise of eminent domain and compensation to sustain the act. So the question depends upon the particular facts.”

The foregoing conclusions would naturally lead to an independent consideration upon the basis suggested, in an attempt to apply the general formula of the Blaisdell Case. However, with respect to emergency moratoria not dissimilar in objective or effect to the enactment under examination, the court, in the Blaisdell Case, has set forth certain criteria of reasonableness by which this court is bound. These were set forth with reference to a statute extending the period of redemption upon foreclosures. The law under examination, at least in so far as it applies to plaintiff’s contract, suspends the right to bring an action at law upon the debt secured until such time as proceedings for foreclosure of the security shall have been completed. If the trustee under the trust deed asks for arid obtains a deficiency judgment, there will be left no cause of action upon the bond. If the trustee does not ask for or obtain such relief, plaintiff must defer action until the foreclosure is complete. At the very least this amounts to a suspension for an indefinite period of plaintiff’s right of action upon the bond, and since plaintiff and others similarly situated are in no position to move in the foreclosure proceedings, it cannot be said that the law has left to plaintiff a substantial remedy in place of that impaired. Hence, the rule in cases holding that there is no such impairment as will invalidate a procedural statute, if a substantial remedy is left, appears to be inapplicable here even if it has survived the Blaisdell Case. Whether it is applicable to cases where the note and mortgage are wholly owned by one person, need not be determined, since the enactment is not capable of being sustained in part, and upon this matter we express no opinion.

All of the conditions, save two, mentioned in the Blaisdell Case as governing the reasonableness of an exercise of police power in cases of moratory legislation, may be passed with the comment that the law appears to meet the tests satisfactorily.

The first condition to which we address our attention is the requirement that the legislation be temporary in operation, and limited to the exigency which called it forth. The statute in the Blaisdell Case was definitely limited as to time. While sec. 269.58 is stated to have been enacted in response to the present emergency, it contains no provision definitely limiting its term. Is this omission fatal to the validity of the act? In Vanderbilt v. Brunton Piano Co. 111 N. J. Law, 596, 169 Atl. 177, the court said:

“We may take judicial notice of the financial emergency that now presses upon so many people in so much of the world, but we may not read into the statute a limited duration that is neither expressed nor implied therein. ...”

On the other hand, the New York court of appeals, in People by Van Schaick v. Title & Mortgage Guarantee Co. of Buffalo, 264 N. Y. 69, 190 N. E. 153, said:

“ 'A law depending upon the existence of an emergency or other certain state of facts to uphold it may cease to operate if the emergency ceases or the facts change, even though valid when passed.’ Chastleton Corp. v. Sinclair, 264 U. S. 543, 44 Sup. Ct. 405. Failure by the legislature to limit the operation of the law to a definite term does not render the law invalid so long as the conditions which justify the passage of the law remain.”

As an original proposition, we would be inclined to the view expressed by the New York court, on the ground that it must be assumed, since the law was enacted as an emergency measure, it was not intended to survive the emergency that brought it forth. However, in the recent case of W. B. Worthen Co. v. Thomas, 292 U. S. 426, 54 Sup. Ct. 816, the United States supreme court held that failure to limit emergency legislation to the period of the emergency was fatal to its validity. In that case “the legislature sought to justify the exemption by reference to the emergency which was found to exist. But the legislation was not limited to the emergency and set up no conditions apposite to emergency relief.”

The next criteria of reasoñableness and validity is thus stated by Mr. Chief Justice Hughes in the Blaisdell Case:

“3. In view of the nature of the contracts in question— mortgages of unquestionable validity — the relief afforded and justified by the emergency, in order not to contravene the constitutional provision, could only be of a character appropriate to that emergency and could be granted only upon reasonable conditions

The court thereupon proceeds to consider whether certain conditions in the Minnesota statute are reasonable. It notes that the integrity of the mortgage indebtedness is not impaired; that interest continues to run; that the validity of the sale and the right of a mortgagee-purchaser to title or to obtain a deficiency judgment is not impaired, and that the conditions of redemption stand as they were under the prior law.

These matters cannot have been intended to describe the conditions upon which relief was granted in the Minnesota statute. They constitute merely an enumeration of the respects in which the rights of the mortgagee have been left unimpaired. The condition upon which relief could be given the mortgagor under the Minnesota statute was that the rental value of the premises be paid by the mortgagor and applied to interest and other carrying charges. This was treated as containing sufficient' compensation to the mortgagee to indicate that the statute “has regard to the interest of the mortgagees as well as to the interest of the mortgagors,” and to make applicable the doctrine of the rent law cases. Marcus Brown Holding Co. v. Feldman, 256 U. S. 170, 41 Sup. Ct. 465; Edgar A. Levy Leasing Co. v. Siegel, 258 U. S. 242, 42 Sup. Ct. 289. It was the reasonable character of this condition that determined the validity of the act. Although not explicitly so stated, the decision seems to imply that the further fact that the granting of an extension is within the discretion of the court, and that it must be granted upon conditions fair and equitable to both mortgagor and mortgagee, is a factor in its validity. The difficulty present in sec. 269.58 is that there are no conditions compensatory to the secured creditor situated as is plaintiff, nor is the matter left to the discretion of a court. With respect to plaintiff’s contract, there is an indefinite, unconditional, and uncompensated postponement of his right. The situation is quite different from that presented by sec. 278.106, where the court, in its discretion, may grant an extension of the period of redemption in foreclosure actions only upon payment of interest or taxes, or both.

It is suggested by defendant that the requirement of conditions compensatory to the mortgagee has no application to statutes affecting the remedy at law under the bond, since a bondholder has no right, by virtue of his bond, to possession of the security or to the rents and profits thereof. It is claimed that the bondholder is consequently not so deprived of property rights by the operation of the act as to entitle him to compensatory conditions. It is unnecessary to express any opinion as to the validity in principle of the distinction suggested. It is our view that the Blaisdell Case offers no support to the suggested distinction, and this construction of the Blaisdell Case is confirmed by the Worthen Case.

In the Worthen Case, supra, the legislature of Arkansas enacted a law exempting the proceeds of insurance policies “from liability or seizure under judicial process of any court.” It was provided that they “shall not be subjected to the payment of any debt by contract or otherwise by any writ, order, judgment, or decree of any court. ...” The court held this law to be unconstitutional as impairing the obligation of contracts. The court said:

“We held that when the exercise of the reserved power of the state, in order to meet public need because of a pressing public disaster, relates to the enforcement of existing contracts, that action must be limited by reasonable conditions appropriate to the emergency. . . . Accordingly, in the case of Blaisdell, we sustained the Minnesota mortgage moratorium law in the light of the temporary and conditional relief which the legislation granted. . . .

“In the instant case, the relief sought to be afforded is neither temporary nor conditional. In placing insurance moneys beyond the reach of existing creditors, the act contains no limitations as to time, amount, circumstances, or need. We find the legislation, as here applied, to be a clear violation of the constitutional restriction.”

After careful deliberation, we are unable to escape the conclusion that sec. 269.58 fails to meet two of the tests definitely prescribed as conditions to validity by the Blaisdell and Worthen Cases. The operation of the rule in the Blaisdell Case presupposes a substantial impairment of contract rights, and requires conditions compensatory to the person whose rights are thus affected. In the instant case the right to have the remedies of execution, garnishment, attachment, and other means of reaching the property of the debtor, is impaired, and the requirements of the two cases cited seem plainly to be applicable. Since we are not at liberty to depart from the criteria definitely laid down by the supreme court of the United States, and applicable to emergency legislation generally, the section must be held to be wholly void and inoperative.

By the Court. — Order reversed, and cause remanded with directions to sustain the demurrer.