Gold Coins and 99 Year Leases:
Howard flags a fascinating contract law case handed down by the Sixth Circuit today. The question, in simplified form: If a 99-year lease signed in 1912 specifies that the lease payments are $35,000 per year, payable "in gold coin of the United States," can the lessor almost 100 years later demand that the payment be $35,000 in gold coinage rather than just $35,000?
For 90 years, the lessor only demanded payment of the dollars themselves, essentially ignoring the "gold coin" provision. And from 1933 to the 1970s, the "gold coin" clause was unenforceable under federal law thanks to U.S. monetary policy. But in 2006, a new company bought the property and began demanding the value of gold coins that on their face are worth $35,000. Does the language of the contract entitle the company to the value of the gold coins rather than just $35,000? In a very interesting opinion, Judge Sutton concludes that it does. Seems pretty persuasive to me, although I don't know much about the topic.
UPDATE: My colleague Donald Clarke chimes in via the comment thread:
For 90 years, the lessor only demanded payment of the dollars themselves, essentially ignoring the "gold coin" provision. And from 1933 to the 1970s, the "gold coin" clause was unenforceable under federal law thanks to U.S. monetary policy. But in 2006, a new company bought the property and began demanding the value of gold coins that on their face are worth $35,000. Does the language of the contract entitle the company to the value of the gold coins rather than just $35,000? In a very interesting opinion, Judge Sutton concludes that it does. Seems pretty persuasive to me, although I don't know much about the topic.
UPDATE: My colleague Donald Clarke chimes in via the comment thread:
The entire case here is just about whether the assignment of the lease to the current lessee in 1982 constituted a novation, an issue because of previous federal legislation about contracts containing such clauses. It's not about the value owed at all, an issue that is sent back to the District Court to resolve.I appreciate the correction.
I must be missing something here -- perhaps the phrasing is understood differently than I interpret it.
Do you mean that it's unclear based on the blog post simplified version or from the opinion itself?
I think you would need some reliance for a laches defense. But hey, I'm a crim guy, not a contracts prof.
Apparently the parties agreed that this wasn't an issue on appeal, and the Sixth Circuit was only presented with the question of whether the clause was enforceable. It wasn't analyzing the effect of the clause on the rent due.
It may be that there is a lot of precedent supporting the position the court (and the parties) took, as the opinion specifies that the clause is intended to be a price-fixing measure to protect the lessor from inflation. Frankly, it looks like either the lessor or the lessee is getting screwed - either the lessee gets a few decades of below-market rent, or the lessor gets a nice windfall.
Someone once asked -- if I sign a contract to be paid $1,000, to be paid only in silver dollars of the 19th century, is the taxable income from that $1,000, or the real value of the coins in present dollars?
Perhaps I misunderstood the opinion, but I took that to mean payment in gold coin consistent with the gold coins in circulation in 1912. The actual amount of gold in gold coins varied widely, and so the "present weight and fineness" language was designed to ensure that the lessee didn't substitute lesser gold coins with the same facial value.
Or did I misread the opinion?
1. The original "gold clause" was not just some random clause that happened to specify a method of payment ("payment shall be made in hundred-dollar bills"), but was a type of clause commonly in use at the time that was specifically intended to protect the lessor from inflation. In other words, it was a method of price-indexing.
2. This dovetails into the second point: as the court noted, the equities arguably point in both directions here. Sure, one party signed onto this agreement in modern times without realizing that the "gold clause" would actually obligate them to pay a lot more than $35,000. But on the other hand, if the court rewrites the agreement to eliminate the price-indexing mechanism, that means one party gets to rent space for $35,000 that is worth far more than that.
This is a quibble, but where your post says (twice) "35,000 gold coins," it should be something like "gold coins with a face value of $35,000." The point being that the number of coins is, or at least should be irrelevant.
I think the complaint may have actually mentioned "35,000 one dollar gold coins," but even that has to be (or at least should be) wrong, for two reasons:
First, even assuming the original intention was that the payment be in the face value of gold coins, why couldn't it be 3,500 ten dollar gold coins? Other equally available denominations would be twenty dollar, five dollar, and two and a half dollar gold coins.
Second, though at the time of the contract one dollar gold coins were still in circulation, they hadn't been minted since 1889, and thus were relatively uncommon. All those other denominations were still being minted. As it happens, today 35,000 one dollar gold coins would cost many times more than any of the other denominations. Requesting 35,000 one dollar gold coins seems to be a coy attempt to get a windfall not just on the value of the gold, but on the differing collectible values of various denominations. This apparent ploy would have been more obvious had the complaint requested payment in three dollar gold coins, which are scarce and expensive, or even four dollar gold coins which are quire rare and cost tens to hundreds of thousands of dollars apiece.
Good point, I have corrected the post.
I *like* it. "Present weight and fineness," but what does that mean?
I had to wonder whether there was some room to argue against any meeting of the minds on the subject, since it's a good bet that no one was *really* expecting rent paid in gold.
Since it was not an issue in the appeal, I don't think we have enough information from this opinion to answer it.
Actually, I think "fineness" is pretty clear concept when it comes to gold.
To my reading, Judge Sutton concludes that the clause is enforceable, but he does not take a position on what the clause means. Instead, he expressly remands to the District Court to interpret the meaning of the clause, which the District Court did not do earlier (because it found the clause the be unenforceable).
On the issue of the value owed, though, just looking at the words won't get us very far. As Steve notes, the opinion states that "gold clauses" like this were quite common in long-term leases of that era as a kind of price-indexing measure to protect against inflation. If that was the parties' intent, then it makes no sense to read the clause as requiring payment of gold coins with a value of $X, since if the lessor wanted gold it could just take the payment of $X and buy gold with it.
So, if the U.S. went and devalued the dollar, moving gold from $20.67 an ounce to $35 an ounce, the amount of gold owed in rent didn't change. A thousand coins with a face value of $35,000, containing an ounce of gold each, wouldn't be $35,000 at the 1912 standard of weight and fineness, and so wouldn't count. Payment must be of 1,881.25 troy ounces of U.S.-minted gold coin, said coins being 90.0% gold by weight -- say, 1750 of $20 Double Eagles.
As a matter of practicality, it would be reasonable for the court today to allow, say, payment of modern U.S. currency sufficient to buy 1693.125 troy ounces of gold at the current spot rate, or some other variation that balanced both the intended value of the payment (specified weight and fineness), and its combined liquidity and availability (coin of the United States).
Now, the enforceability of old gold clauses, given everything else that's happened in the last 96 years? That's interesting. The bit where the contract effectively prohibits any non-novation transfer, thus making the gold clause a new contract for the 1977 Act of Congress looks well-reasoned to me.
As to whether that's the correct legal outcome, I confess I have no idea.
Congress passed laws in 1933 which made all gold clauses in private contracts null. Did the 1970's legislation which made private ownership of gold legal again explicitly reverse the effect of the earlier nullification? If not, I'd think that gold clauses in old contracts would still be dead, even if new ones can be written.
As I understand how gold clauses generally are understood, what it means is the standard at the time the contract is signed. That is, if at that time, $35,000 gold dollars contained 25.8 grains each of 90% gold, then that was the amount of gold that had to be paid, regardless of what form it took at the time of payment.
If that understanding is correct, then it's a slam dunk -- this means now however much it costs today to buy the same amount of gold as was in $35,000 in gold dollars at the time the contract was signed. (Given that the novation resuscitated the gold clause.)
I suspect the point was rather simply to be able to require payment in "hard" money instead of paper money, because paper money could, in those days -- well, more in the days 50 to 100 years earlier, but I suppose the memory stuck -- become worthless without an equivalent movement in prices. In other words, it's not that the owner wanted to guarantee his real rent (as opposed to nominal, un-inflation-adjusted rent) so much as he wanted to avoid being paid in some paper (like Confederate dollars) that might suddenly become utterly worthless.
We tend to forget, in our thoroughly monetized world, that once upon a time the connection between paper money and prices was more tenuous, simply because people did deal in specie, and even barter. Indeed, in the late 18th through mid-19th century, paper money was almost synonymous in the popular imagination with government hucksterism.
From a standpoint of equity, the landlord is right: the original agreement provided an escalator clause. FDR (unconscionably to my way of thinking) invalidated the clause for a while, and even when the clause became valid again, it was allowed to remain dormant.
The tenant has had 75 years of scamming off the landlord; that's enough.
The clause was intended as a hedge against debasement of the currency, which is not at all a modern phenomenon, and is indeed exactly what has happened in the US since 1933. Historically, governments debase their currency whenever they can get away with it. Keynesian economists have thoroughly muddled the popular understanding of what inflation is, but Austrian economists still understand the word to be synonymous with debasement of currency.
Seriously, though, thanks to those above who explained how the gold coins were intended as a hedge against inflation. Good stuff. I hope Orin follows up with another post if and when the District Court opinion comes in.
Yes, a farmer who owed the bank a fortune saw inflation as a boon and deflation as a threat in 1912. On the other hand, someone of significant net wealth would fear inflation and would see benefit from deflation. Given that per capita annual income in the U.S. in 1912 was $340, somebody who owned land worth a rent of $35,000/year was certainly someone of significant wealth.
Hmm.
The 1 oz. coin there says $50, so it's not coined to the same standard of weight and fineness as 1912 gold coinage. So specifying payment as $84,663.76 (nominal face value) of current American Eagle Bullion coins would no more match the letter of the clause than allowing payment in modern U.S. currency sufficient to buy 1693.125 troy ounces of gold at the current spot rate.
So, was the intent of the clause more to preserve the value of the agreed price, or to ensure receipt of the specified quantity of gold?
If the former, since the value 1912 coins would be fully liquid at their face value, like modern Federal Reserve notes but unlike modern-mint gold coins, then payment of Federal Reserve Notes sufficient to buy 1693.125 troy ounces of gold at the current spot rate would better accord with the intent.
If the latter, payment of $84,663.76 (nominal face value) of current American Eagle Bullion coins would better match the intent; while extracting their value into a liquid form would involve transaction costs (good ol' bid-ask spread), they do provide payment in gold.
This is probably not a matter before the courts, since both sides seem to be taking the "value" interpretation as given, and instead are arguing over whether the clause applies at all. However, if the lessee tried to pay in $84,663.76 (nominal face value) of current American Eagle Bullion coins, it would be interesting to see which way a judge decided.
Hm? Surely they wouldn't pass a law which says "if your contract says you have to pay in gold you don't have to pay anything at all". So exactly what does this mean?
Did they explicitly pass some law that invalidates such contracts, and if so, what did the law say had to be paid instead? Or did they just implicitly invalidate them by saying that gold is illegal? If the latter, then would that really nullify the clause, or would it just make the clause unenforceable but still existing, in which case a further change to the law might make it enforceable again?
It doesn't say you don't have to pay anything at all, but it does say you can pay in Federal Reserve Notes of equal face value even if the contract explicitly indicates otherwise.
Further research reveals Southern Capital v Southern Pacific, a case in 1977 where the question of whether gold clauses from before 1933 were returned to validity, and the court held that they were not:
In the Act of Sept. 21, 1973, Pub.L.No.93-110, § 3, 87 Stat. 352, Congress specifically repealed sections 3 and 4 of the Gold Reserve Act of 1934, 31 U.S.C. §§ 442 and 443. We note, however, that neither the Joint Resolution or its codification in 31 U.S.C. § 463 is expressly mentioned. In the subsequent Act of Aug. 14, 1974, Pub.L.No.93-373, § 2, 88 Stat. 445, Congress provided that no provisions of any law may be construed to prohibit any person from purchasing, holding, selling or otherwise dealing with gold in the United States or abroad. As it is clear that the Joint Resolution was not expressly repealed by either Act, the question remains whether it was repealed by implication.
In Morton v. Mancari, 417 U.S. 535, 550, 94 S.Ct. 2474, 2482, 41 L.Ed.2d 290 (1974), the Supreme Court stated that "(i)n the absence of some affirmative showing of an intention to repeal, the only permissible justification for a repeal by implication is when the earlier and later statutes are irreconcilable." We are not persuaded in the instant case that Congress intended to repeal the Joint Resolution by the two enactments in 1973 and 1974.3
We note that in the Act of Oct. 28, 1977, Pub.L.No.95-147, 91 Stat. 1229, Congress has now specifically made the Joint Resolution nonapplicable to obligations issued on or after October 28, 1977. If Congress had earlier intended to implicitly repeal the Joint Resolution, it is highly doubtful that the Act of October 28, 1977, would have been necessary. Additionally, this recent Act clearly expresses the congressional intent to make the Joint Resolution nonapplicable to obligations issued on or after October 28, 1977. We are unable to find an earlier congressional intention to repeal the Joint Resolution.
Waiver would seem to be the bigger problem because, even assuming that the 1982 novation revived the "gold coin clause," that still meant 24 years passed without the lessor trying to enforce the clause. The new owner, which presumably took the lease by assignment, should be subject to that defense since a contracting party can normally raise all the same contract defenses against an assignee that it could raise against the assignor.
As for the contract language itself, my take is that it entitles the lessor to receive gold coins totaling $35,000 in today's dollars, i.e., around 42 ounces of gold coins. The interesting thing is that this means damages (which would reach back several years as discussed above) could still be quite significant since the lessor would have to receive the amount of gold equivalent to $35,000 in the year that the payment was due, so that could be 50 to 80 ounces or more for a given year, depending how far back the SOL allows the claim to run (maybe as much as 10 years).
The leesee has to accept them as payment of debt.
I don't see why the latter would apply at all. The leesee is owed dollars by contract. He intended to be paid in dollars made of gold coin, but Federal Reserve Notes are also dollars and are declared by fiat to be legal tender for all debts owed in dollars.
money after revocation of the prior laws, or do they remain purely collectors items?
If they're not currently money, this court ruling seems absurd (though it really just dumps that issue back on the lower court, telling them to find another excuse).
The American Gold Eagle is one of few gold pieces currently legally defined as money,
but its status is a mess, as reflected in the Kahre case. When a 4 month trial with
extensive PhD testimony cannot decide whether coins sold only as bullion or proof sets
have a value of their sales price or bullion value, or an artificial face value legally
defined as US tender thanks to Ron Paul trying to (deservedly) tweak the IRS and Fed, a
court finding that this contract be valued in those coins could be void for vagueness
if it cannot be clearly identified whether a $50 American Gold Eagle is worth $50 or
$800-$1000.
http://en.wikipedia.org/wiki/American_Gold_Eagle
http://www.lvrj.com/news/9893062.html
For comparison, a $20 Double Eagle sells for about 60 times face value, while a $1 gold
coin of the era of this original lease sells for about 120 times face, or higher if a
rare year or in superior condition. However, if those aren't currently legal tender,
and the contract is written in a face dollar value, how could such coins be considered
payment of a finite annual sum named in dollar value?
Defining a named dollar sum of gold coin "of the present weight and fineness" impresses
me as implying an expectation that gold coin would exist for the duration of the
contract and have intrinsic value even if paper currencies did not, but that the mint
might adjust the metal purity or weight based on changes in market values or legal
policies. It seems a stretch to think that a dollar value would be named if the
contract intent were to require X ounces of gold within whatever alloy the mint
currently produced, regardless of face value. If the mint made no gold coins as legal
tender at the time of the contract assignment, but released new ones at a later year,
it also makes little sense that a meeting of the minds on a new contract (the main
apparent issue of this appeals court finding) could exist to revalue $35,000 cash into
some alternate or historic coinage that didn't then currently exist as legal tender.
This ruling doesn't seem to have answered much, but merely tossed aside one technical
excuse to not review some bigger legal messes. At most it might change the rent on a
building valued at $2.5 million rent to $650,000 cost for 700 facially $50 bullion
coins, or it might change nothing but enrich a few lawyers.
How many Federal Appeals Court opinions contain such a reference? Wonderful image...
You are saying that because the dollar has been debased relative to gold, the same number of dollars should be paid, resulting in less value being handed over. But the contract had an explicit clause saying "I don't care what you call a dollar today. The amount of payment is based on a fixed standard of how much gold makes a dollar."
Essentially, the contract specified payments made in dollars for an amount specified based on how much gold was in $35,000 in gold dollars on the date the contract was signed.
I think you have confused the issue. People of all classes worry about the effects of the monetary regime in place at any given time. Deflation is the characteristic systemic problem of a specie currency. OTOH, inflation is the characteristic systemic problem of a fiat currency system, such as we have now in the United States.
In the 19th century, the best currency regime was subject of constant and highly contentious political debate. It was overshadowed only by the issue of slavery. Several of the most famous political battles of that era were about currency regimes, such as Andrew Jackson's battle against the Bank of the United States, and much later William Jennings Bryan's "Cross of Gold Speech at the 1896 Democrat Party Convention", which led to his nomination as the Democrat candidate for President that year.
Bryan advocated coinage of an unlimited number of silver coins at a 16AG/1AU ratio by weight. This proposal would have been highly inflationary at a time when many Americans were farmers dependent on borrowed money for their land and to finance their crops. Bryan ran again in 1900. Landlords and lenders put gold clauses in their contracts against the obvious political and economic risk. Their worst fears came true in 1933 when Congress outlawed payment in gold.
The courts failed in their duty by leaving congresses' unconstitutional action in place long after any excuse of emergency had passed. Certainly after the Breton Woods agreements, the courts should have resumed their enforcement.
Be that as it may, I am glad that the 6th Circuit has decided to enforce the gold clause. I think the most natural reading of the clause is that the payee would be entitled to the market value of 1693.125 troy oz of pure gold which is about $1.4 million today.
I also note that the CPI inflation from 1912 to now is about 21x, which would mean a nominally adjusted rent for the property would be about $735,000. Neither CPI nor the price of gold is a perfect indicator of inflation, but I am comforted that the numbers are in the same ballpark.
Probably because draftsmen of the era were concerned about legal doctrines, including the "rule against perpetuities" that would divest the landlord of his reversionary interest in the property.
problembenefit of a specie currency."There fixed that for you.
The whole purpose of FDRs meddling with the currency (which by the way turned what should have been another minor depression, aka. recession, into a major one) was to screw creditors, and allow the government to debase the currency, both of which were illegit and truly criminal goals.
The party owed the gold equivalent payment here was screwed over by a force, the government, that that party had no power to control. He wasn't amending the agreement "voluntarily" you think is evidenced.
I see no just reason why one party to this contract should be able to on a continuing basis screw over the other party.
The original terms of the contract are actually void and the lease should be dissolved. If not then somebody owes a lot of back rent. Those are the only two just outcomes.
The gold clause was explicitly intended to protect against exactly this situation -- one in which the value of a dollar relative to gold goes down due to debasement of the curcency.
Who pays the property taxes?
Does the evaluation recognize that a property with a long lease (extendible to even longer) limits the value of a property at least as much as one of those conservation easements?
Does the rule against perpetuities apply? I've read about life-estate type leases that ran for "three lifetimes". I can almost understand that type of thing in the pre-industrial times when that story was taking place, but by 1912 people sort of understood money in the bank (although if they really understood it, they indeed would have been demanding tangibles) - what motivates a person to lease instead of sell? I sort of understand why a country might take that long view, but for natural persons I'm having trouble getting around "In the long run, we are all dead". (But my family hasn't had the right to own land for much more than a century.)