§ 515. Refusal of Federal Courts to Follow State Decisions Holding State Laws Void.

The cases which have been considered in the paragraphs which have gone immediately before have been ones in which there has been state legislation impairing contracts created by or resting upon prior statutes. In these cases the federal court has sought to determine for itself whether these earlier laws were constitutional as tested by the state constitutions of the States whose legislatures enacted them. We have now to turn to a class of cases in which the federal Supreme Court, without considering as an independent proposition the constitutionality of state laws, has refused to follow the decisions of the highest state courts. holding them to be void, when to do so would be to render null contracts which have been entered into, the parties thereto relying in good faith upon the validity of such laws. Here, it is to be observed, the federal tribunal has not said that the state laws in question are to be treated as continuously constitutional and valid, that is, valid in futuro, the decisions of the state courts to the contrary notwithstanding, but only that, contracts which have been entered into in reliance upon them are not to be affected by their unconstitutionality. Thus, in effect, the position is taken that laws which are unconstitutional as judged by the state constitutions, and, therefore, void, may have a de facto character that will furnish a legal basis for contracts founded upon them.

tify its taking jurisdiction over cases from state courts where contract rights are impaired by the reversal or modification of rules of law previously estab lished by such courts. This practice may easily be extended to state cases passing upon for the first time and holding unconstitutional laws acted upon as valid, and under which contract rights had arisen before they were declared invalid; in just this manner was the rule of Gelpcke v. Dubuque extended so as to cover such cases as Hotel Co. v. Jones [see infra, Section 520]

A more logical view would be for the court to hold a judicial decision to be a 'law' in the technical sense, but the present attitude is better for the court, because it permits the Supreme Court to take or refuse jurisdiction as it pleases, while the holding of a decision to be a 'law' would operate to give an appeal to the Supreme Court as a matter of right from state decisions impairing the obligation of contracts."

§ 516. Distinction Between Cases Coming to the Supreme Court by Writs of Error to State Courts and Those

Originating in Lower Federal Courts.

In passing upon decisions of state courts overruling their prior decisions and thereby invalidating contracts entered into in reliance upon such prior decisions, there is a sharp distinction drawn between those cases in which the cause comes before the federal courts because of the citizenship of the parties thereto, and thence by appeal to the Supreme Court and those coming to the Supreme Court by writs of error to the highest state courts.

In the latter class of cases the only ground of federal jurisdiction is that the obligation of a contract has been impaired; that, in other words, a right guaranteed by the federal Constitution has been violated. In McCullough v. Virginia, as in an unbroken line of previous cases, the members of the Supreme Court all agreed that federal jurisdiction exists only in case the decision of the state court appealed from has given effect to a state legislative act impairing a contract previously entered into. Their only disagreement in that case was as to whether, in fact, the decision of the Virginia court had given effect to legislation of this character.

§ 517. Cases Based on Diversity of Citizenship.

In those cases coming to the federal Supreme Court by way of appeal from a lower federal court there is no question of federal jurisdiction, and in them, the federal courts determine for themselves which, if any, of the decisions of the state courts dealing with the state laws or with principles involved they will follow.

In this class of cases, the federal jurisdiction over which is based upon the diversity of citizenship of the parties thereto, the doctrine is well established that where a state court has reversed its ruling as to the state law governing a case, the federal courts will not follow the later decision, when to do so will make it necessary to hold void or to impair the obligation of contracts previously entered into. In other words the first construction is treated as though it becomes a part of the law or constitutional

provision, and the later and differing construction as a law in amendment or appeal thereof. Thus in Burgess v. Seligman2 the court say. "When contracts and transactions have been entered into, and rights have accrued thereon under a particular state of the decisions, . the federal courts properly claim the right to adopt their own interpretation of the law applicable to the case, although a different interpretation may be adopted by the state courts after such rights have accrued."

Originally the Supreme Court went only so far as to protect a contract entered into under a law which had previously been held valid by the state courts, as against a later decision holding the law unconstitutional and void. Of late, however, as we shall see, the court has taken the further step of protecting contracts entered into under a law before its constitutionality has been upheld in the highest courts of the State; the argument necessarily being that a state legislative act is, even in advance of judicial affirmation, presumptively valid, and, therefore, that a later ruling of the courts to the effect that the law is invalid, operates to impair or destroy the obligation of the contracts which those entering into them have a right, at the time, to believe are legally enforceable agreements.

In these cases it is to be observed that the doctrine of the Supreme Court is not only to hold that the obligation clause warrants a refusal upon the part of the federal courts to follow the constructions given by state courts to their own state laws, but also to hold that a judicial decision is a "law" within the meaning of the provision of the federal Constitution that no State shall "pass any law impairing the obligation of contracts."

§ 518. Gelpcke v. Dubuque.

Disregarding the earlier case of Rowan v. Runnels73 in which, though the point was involved and passed upon, the argument was not elaborated, the first important case in which the doctrine was clearly laid down that the federal courts need not follow the latest

72 107 U. S. 20; 2 Sup. Ct. Rep. 10; 27 L. ed. 359.

73 5 How. 134; 12 L. ed. 85.

74

decisions of the state courts construing state laws or constitutional provisions when to do so will be to impair the obligation of contracts entered into in reliance upon earlier decisions holding them void, was that of Gelpcke v. Dubuque, decided in 1863. This case came up on appeal from a federal district court, and was a suit to recover upon certain bonds issued by the city of Dubuque, Iowa, which bonds had been issued under authority of an act of the state legislature. The constitutionality of this act had been upheld by the highest court of Iowa at the time the bonds were issued, but later decisions of that court had held the act unconstitutional, and, therefore, the bonds invalid. In its refusal to accept this last judgment of the Iowa supreme court, the federal Supreme Court did not base its refusal upon the ground that the construction was unsettled,75 for in its opinion, after quoting from Leffingwell v. Warren76 that it would follow the latest "settled " adjudications, the court say: "Whether the judgment in question can, under the circumstances, be deemed to come within that category, it is not now necessary to determine." The earlier decisions of the Iowa supreme court, the federal Supreme Court say, were reasonable ones, "sustained by reason and authority," and “in harmony with the adjudications of sixteen of the States of the Union." But not upon this ground, also, is the construction of the later decisions repudiated. The refusal to follow them is based explicitly upon the doctrine that, relying upon the earlier decision, contracts had been entered into which would be impaired should the later decisions be followed. "However we may regard the late case in Iowa as affecting the future," say the court, "it can have no effect upon the past. The sound and true rule is that if the contract, when made, was valid by the laws of the State as then expounded by all departments of the government, and administered in its courts of justice, the validity and obligation cannot be impaired by any subsequent action of legislation, or

74 1 Wall. 175; 17 L. ed. 520.

75 As to the rule regarding this see Section 595. 76 2 Black, 599; 17 L. ed. 261.

decision of the courts altering the construction of the law.'" The same principle applies where there is a change of judicial decision as to the constitutional power of the legislature to enact the law."

It will be observed that in this case, though the earlier holding of the state supreme court as to the constitutionality of the act authorizing the bond was declared a reasonable one, it is not upon this ground that the later decision as to its unconstitutionality is repudiated. The relative merits of the earlier and the latest holding of the state court, as an abstract proposition, is not passed upon. It is not asserted that, except as to contracts entered into prior thereto, the state law declared void by the latest decision of the state court is to be treated as a nullity.

The doctrine declared in Gelpcke v. Dubuque has been much criticized upon the double ground that it treats a decision of a state court as a "law" impairing the obligation of contracts, and that it implies an assumption upon the part of the federal courts of a right not simply to apply impartially as between citizens of different States the state law as it finds it (this, it is claimed, being the sole reason for which federal jurisdiction in suits between citizens of different States is given), but to determine what that law is.

But however open to technical criticism, the doctrine has since been repeatedly affirmed and may now be considered beyond dispute.78

77 Quoted from Ohio Life Insurance & Trust Co. v. Debolt, 16 How. 416; 14 L. ed. 997.

78 In Township of Pine Grove v. Talcott (19 Wall. 666; 22 L. ed. 227) the court say: "The national Constitution forbids the State to pass laws impairing the obligation of contracts. In cases properly brought before us that end can be accomplished unwarrantably no more by judicial decision than by legislation."

In Douglass v. County of Pike (101 U. S. 677; 25 L. ed. 968) the court say: "The true rule is to give a change of judicial construction in respect to a statute the same effect in its operation on contracts and existing contract rights that would be given to a legislative amendment; that is to say, make it prospective not retrospective." See also Green Co. v. Conness, 109 U. S. 104; 3 Sup. Ct. Rep. 69; 27 L. ed. 872; Los Angeles v. Los Angeles Water Co., 177 U. S. 558; 20 Sup. Ct. Rep. 736; 44 L. ed. 886.