Academic

Collateral Damage in the Mortgage Modification Bill: Gold Clause Cases Redux

By Calvin Massey

Over at the Volokh Conspiracy Todd Zywicki has this post in which he notes that the House version of the mortgage modification bankruptcy bill contains a provision that declares to be "unenforceable" any term in a contract that allocates bankruptcy losses among holders of the securitized mortgage-backed securities.  Todd wonders:  " Has anyone ever seen anything like this--just a blanket declaration that a particular contract term is simply void against public policy, when it is a freely-bargained for, risk-allocation term?"  Well, yes, we have.  The Gold Clause Cases (actually three separate cases: Norman v. B & O Railroad, Nortz v. United States, and Perry v. United States) nullified gold clauses in private contracts.  A gold clause required a debtor to repay the principal amount of the loan in dollars worth the same amount of gold as when the contract was made.  For example, if at the time a loan of $100,000 is made a dollar was defined as worth 2 grams of gold and at the time for repayment of the principal a dollar was defined as worth 1 gram of gold, the debtor would be obliged to pony up $200,000.  Because the FDR administration junked the gold standard it also declared gold clauses to be unenforceable, and the Court agreed that this was perfectly valid.  The Court reasoned that because the government has the constitutional power to establish a monetary system, this abrogation was a necessary and proper means to that end.  I suppose that today's Court would reason that the section Todd cites is a necessary and proper means to the end of implementing Congress's power to establish uniform rules of bankruptcy. 

Full post as published by The Faculty Lounge on March 06, 2009 (boomark / email).