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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:
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.
Hoosier:
Sorry for my ignorance, but what is "gold coin of the US"? I assume this would have to mean rather old coinage?
8.27.2008 6:15pm
OrinKerr:
See, e.g., here.
8.27.2008 6:18pm
sdfdddd:
As a matter of contract interpretation, it's not clear to me that the literal terms of the contract, as stated here, entitle plaintiffs to the value of 35,000 gold coins. I read this as stating they get $35,000 per year AND that this should be paid with gold coins. Therefore, under my reading, they are entitled to payment of $35,000 worth of gold coins (presumably a very small number of coins now that gold is extremely valuable), not 35,000 one-dollar 1912 gold coins.

I must be missing something here -- perhaps the phrasing is understood differently than I interpret it.
8.27.2008 6:20pm
Oren:
Yeah, I would think that any contract that requires as payment an object that no longer exists is bordering on meaningless. Then again, the repeated Congressional meddling in this particular area makes me too queasy to formulate a judgment on the instant case.
8.27.2008 6:21pm
Oren:
sdf -- that was my intuition on what would be proper absent Congressional intervention. What Congress has actually wrought here, I have no idea . . .
8.27.2008 6:22pm
OrinKerr:
sdfdddd,

Do you mean that it's unclear based on the blog post simplified version or from the opinion itself?
8.27.2008 6:26pm
tvk:
One thing that confuses me (admittedly I am no expert on this issue): why isn't there a perfectly good statute of limitations and laches defense if the lessee has been paying (in supposed breach of contract) only $35,000 for over twenty years?
8.27.2008 6:29pm
Norman Bates (mail):
Isn't there any case law suggesting that the prolonged non-enforcement of a very odd (by contemporary standards) contractual clause makes that clause permanently unenforceable? It would also seem that the primary intent of the property owners is to break the lease by imposing unusual difficulties on the lease holders. Shouldn't this have some bearing on the court's decision?
8.27.2008 6:32pm
OrinKerr:
Norman,

I think you would need some reliance for a laches defense. But hey, I'm a crim guy, not a contracts prof.
8.27.2008 6:34pm
DanJ (mail):
tvk: Without reading any of direct history on the case, these would be my answers: 1.) On the SOL question, I would imagine that the time period was measured from the time of the lessee began making payment of 35K in paper money to the new lessor, and the lessor wasn't claiming damages caused by the lessee's prior payments of paper money to the prior lessor or that were beyond the applicable SOL period; and 2.) On the laches question, its my understanding that since a breach of contract seeks legal rather than equitable relief, laches as an equitable defense doesn't apply.
8.27.2008 6:44pm
Colin (mail):
I haven't read the opinion very closely, but I'm inclined to agree with sdfdddd. The clause apparently states that "[a]ll of said rents shall be paid in gold coin of the United States of the present standard of weight and fineness." I read that not as a requirement that the rent must be paid in a sum of coins with a face value of $35,000, but that the rent is $35,000 and it must be paid in gold coins of equivalent actual value.

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.
8.27.2008 6:46pm
Dave Hardy (mail) (www):
I'd think there might be an argument for $35,000 in 1912 type gold coins, or its equivalent. What with the controversies over silver coinage (let alone past experience with paper money), requiring payment in gold would likely have been a sort of cost of living adjustment. Back then, I think, the rent would have been equal to, oh, 80-100 working families' incomes. Today it's more like that of 1 to 1.5.

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?
8.27.2008 6:48pm
KAT:
The posting doesn't include the language that requires payment in gold coin consistent with the present weight and fineness. This does indicate that the dollar amount of the currency was not intended to be the determining factor in how much gold would be paid in the future.
8.27.2008 6:50pm
OrinKerr:
KAT,

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?
8.27.2008 6:56pm
Steve:
There are two salient points that may escape people who read only the posting and not 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.
8.27.2008 7:00pm
LM (mail):
Orin,

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.
8.27.2008 7:04pm
Houston Lawyer:
Could the tenant get an offset against the rent paid from 1933 to 1970 (:-)
8.27.2008 7:06pm
Sean O'Hara (mail) (www):
The Mint calls the Sacagawea dollars "gold coins" even though they don't contain gold. I wonder what would happen if the lessee got 35,000 of them in a dump truck and left them in the company's parking lot?
8.27.2008 7:11pm
OrinKerr:
LM,

Good point, I have corrected the post.
8.27.2008 7:12pm
Anderson (mail):
The Mint calls the Sacagawea dollars "gold coins" even though they don't contain gold. I wonder what would happen if the lessee got 35,000 of them in a dump truck and left them in the company's parking lot?

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.
8.27.2008 7:32pm
A.S.:
Perhaps I'm missing something, but isn't the question that sdfdddd brings up (at 5:20) a question for the District Court on remand?

Since it was not an issue in the appeal, I don't think we have enough information from this opinion to answer it.
8.27.2008 7:35pm
OrinKerr:
Anderson,

Actually, I think "fineness" is pretty clear concept when it comes to gold.
8.27.2008 7:35pm
A.S.:
Also, Steve writes (at 6:00) that the gold clause was "a method of price-indexing". Could he explain further? As I understand it, some types of gold coins were still being minted at the time. Accordingly, could one get a $10 (face value) gold coin in 1912 for... $10? Wouldn't one expect that, for the forseeable future, a $10 gold coin would similarly be available for $10? So how would it hedge against inflation? I don't understand. To me, this only became an issue when the mint stopped making gold coins, thereby uncoupling their fair market value from their face value.
8.27.2008 7:43pm
Anon Y. Mous:
I wonder if, back in the day, gold certificates were considered as "gold coin of the United States of the present standard of weight and fineness". They were in use in 1912, the date of the contract. Of course, they were paper money and definitely not coinage, but perhaps it was a standard substitute at the time.
8.27.2008 7:56pm
A.S.:
BTW - further to my 6:35 post, I think Orin is mistaken to write that Judge Sutton concludes that "the language of the contract entitle the company to the value of the gold coins rather than just $35,000".

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).
8.27.2008 7:58pm
Donald Clarke (www):
A.S. is right - 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.

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.
8.27.2008 8:12pm
D.R.M.:
The original meaning of the contract is pretty clear. The concepts of unbacked currency (greenbacks), silver-backed currency (Bryan and the 16-to-1 coinage of free silver), and currency debasement (reducing the fineness of coins) were all well-known in 1912. Specifying "gold coin of the United States of the present standard of weight and fineness" was designed as a check against any of those three things; it meant payment would only be accepted in gold dollars of the 1912 valuation (standard).

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.
8.27.2008 8:29pm
Numismatics Geek:
In 1912, the U.S. was on the gold standard, and the federal government fixed the price of gold at $20.67 an ounce. A coin's face value was equal to the value of its gold content: a double eagle ($20 gold piece) contained slightly less than an ounce of gold, an eagle ($10 gold piece) contained just under a half-ounce, and so on. Thus $35,000 in gold coin "of the present [1912] weight and fineness" would have meant coins containing, in the aggregate, a total of (35,000/20.67)=1693.3 ounces of gold. So if the contract is enforced literally, the lessee owes that amount of gold (or, presumably, its cash equivalent calculated at today's market price of gold).
As to whether that's the correct legal outcome, I confess I have no idea.
8.27.2008 8:49pm
Numismatics Geek:
And while I was writing that, I see D.R.M. beat me to it. Sorry for the redundancy.
8.27.2008 8:53pm
Gabriel McCall (mail):
Tangential but interesting: in the Robert Kahre tax trial last year, juries refused to convict businessmen who were paying their workers in US minted gold and silver coins and then reporting the wages paid as the face value of the coins.

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.
8.27.2008 9:08pm
Gulf Coast Bandit (mail):
Does the 1982 novation mean that S&R could pay at the 1982 price of gold instead of the 1912 price? $35K divided by $375/oz. would be 93.33 oz. of gold, which is a lot better for S&R than 1700 oz. Or does the "present standard" still refer to the 1912 standard?
8.27.2008 9:58pm
David Schwartz (mail):
The contract says "the present standard", does that mean at the time the contract was made or at the time the payment is made? Is "of the present standard of weight and fineness" meant to fix the standard at whatever is the standard at the time the contract is signed? Or is it meant to adjust the standard to however payments are typically made at that time?

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.)
8.27.2008 9:59pm
Ken Arromdee:
Gold right now costs around $830 an ounce. If it was $20.67 at the time of the contract, 96 years ago, that's 3.92 percent a year. If the intent of the clause was as a shield against inflation, that's not an unreasonable amount of inflation at all, and the parties to the contract could easily have legitimately had that in mind. If you crunch the numbers, the amount doesn't seem ridiculously large at all.
8.27.2008 10:21pm
Splunge:
I doubt the clause was intended as an inflation index. Widespread fear of inflation is a pretty modern phenomenon; historically, and certainly in the early Industrial Age, price deflation was more widely feared.

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.
8.27.2008 11:11pm
Malvolio:
Laches does not, I don't think, apply. The tenant is not in a worse position because the landlord "slept on his rights" -- indeed he is a much better one, financially at least, because he has been paying a rent from 1923 for the last 25 years. If the landlord wanted back rent, he might have a point.

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.
8.27.2008 11:19pm
Gabriel McCall (mail):
I doubt the clause was intended as an inflation index. Widespread fear of inflation is a pretty modern phenomenon; historically, and certainly in the early Industrial Age, price deflation was more widely feared.

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.
8.27.2008 11:39pm
A.S.:
I think Orin, in his update, should have quoted Mr. Clarke's entire sentence... especially the "A.S. is right" part.

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.
8.28.2008 1:27am
vinnie (mail):
but the united states DOES produce gold coin.
8.28.2008 2:22am
OrinKerr:
A.S. is right! Indeed, you were -- I used Don's explanation better because he said what the opinion actually did do, too. Plus, I see him at the office, so he gets top billing. ;-)
8.28.2008 2:32am
D.R.M.:
Splunge, sure, there wasn't widespread fear of inflation. Both the Greenback Party and the Free Silver movements were popular movements that had increasing inflation as their explicit goal. However, the inflation those interests supported was seen as a threat by the "monied interests" who opposed both unbacked currency and bimetallism.

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.
8.28.2008 3:06am
D.R.M.:
Vinne --

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.
8.28.2008 3:48am
Ken Arromdee:
Congress passed laws in 1933 which made all gold clauses in private contracts null.

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?
8.28.2008 6:49am
Gabriel McCall (mail):
31 USC 463: '(a) Every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby, is declared to be against public policy; and no such provisions shall be contained in or made with respect to any obligation hereafter incurred. Every obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein or made with respect thereto, shall be discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts.

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.
8.28.2008 10:09am
some dude:
from 1933 to the 1970s, the "gold coin" clause was unenforceable under federal law thanks to U.S. monetary policy
That would be an ex post facto law wouldn't it? It retroactively voided a valid contract.
8.28.2008 10:17am
some dude:
sdfdddd:
As a matter of contract interpretation, it's not clear to me that the literal terms of the contract, as stated here, entitle plaintiffs to the value of 35,000 gold coins. I read this as stating they get $35,000 per year AND that this should be paid with gold coins.
Even today a 1 oz US gold coin has a face value of 50 dollars.
8.28.2008 10:25am
Just Dropping By (mail):
I'll offer the observation in regards to some of the earlier posts about the statute of limitations that the SOL shouldn't be a total bar in this case because the lease would be a form of installment contract and thus a new breach would happen each time the lessee failed to make the payment in gold coins, so the lessor would have several years of non-time barred claims (however long the SOL for contract actions is under the law of the applicable state).

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).
8.28.2008 10:26am
some dude:
It is all moot. Federal Reserve Notes are stamped "this note is legal tender for all debts, public and private."

The leesee has to accept them as payment of debt.
8.28.2008 10:33am
ParatrooperJJ (mail):
When leaving the country, US Customs only considers the face value of US issued gold coins for the $10,000 reporting limit.
8.28.2008 10:42am
Adam J:
some dude- The issue isn't whether he can pay in federal reserve notes, the issue is how many federal reserve notes. It could be 25k in legal tender, or it could be the equivalent of 25,000 gold coins in legal tender.
8.28.2008 11:20am
some dude:
In retrospect the leesee should have written the contract in ounces of gold, and avoid all confusion, but he had no reason to. Ounces of gold translated to dollars directly at the time.

Adam J- The issue isn't whether he can pay in federal reserve notes, the issue is how many federal reserve notes. It could be 25k in legal tender, or it could be the equivalent of 25,000 gold coins in legal tender.


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.
8.28.2008 11:46am
LokiVA (mail):
Are gold coins predating the ban on private gold or use as currency still considered

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.
8.28.2008 12:24pm
EconomicNeocon (mail):
Assuming (as I must due to time constraints) that US gold coins were routinely in production and circulation at the time the lease was signed and therefore widely available, perhaps an impossibility defense might hold here?
8.28.2008 12:25pm
David Chesler (mail) (www):
Why were long-term leases written for 99 years and not 100 years?
8.28.2008 1:28pm
Opher Banarie (mail) (www):
From the opinion:

As a matter of sheer economics, it is hard to say which party has the sharper elbows.

How many Federal Appeals Court opinions contain such a reference? Wonderful image...
8.28.2008 1:32pm
David Schwartz (mail):
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.
We agree he's owed dollars, the question is how many. The contract didn't say "$35,000 of whatever passes for dollars at the time". The contract explicitly fixes the definition of a dollar, relative to gold, at a fixed standard.

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.
8.28.2008 1:53pm
Fat Man (mail):
I doubt the clause was intended as an inflation index. Widespread fear of inflation is a pretty modern phenomenon; historically, and certainly in the early Industrial Age, price deflation was more widely feared.


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.

Why were long-term leases written for 99 years and not 100 years?


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.
8.28.2008 3:53pm
Dilan Esper (mail) (www):
The correct defense here isn't laches, but practical construction. By accepting $35,000 in payment for so long, the parties basically clarified, amended, or evidenced that their agreement was for a payment of $35,000 in value, not the market value of $35,000 in gold pieces.
8.28.2008 8:15pm
ReaderY:
I don't understand all this talk about U.S. legal-tender gold coinage no longer being minted. What about these?
8.28.2008 9:18pm
ReaderY:
There seem to be interesting tax implications. See this.
8.28.2008 9:26pm
Brian Macker (mail) (www):
"[Price not monetary] deflation is the characteristic systemic problem benefit of a specie currency."

There fixed that for you.
8.29.2008 8:39am
Brian Macker (mail) (www):
"The correct defense here isn't laches, but practical construction. By accepting $35,000 in payment for so long, the parties basically clarified, amended, or evidenced that their agreement was for a payment of $35,000 in value, not the market value of $35,000 in gold pieces."

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.
8.29.2008 8:49am
David Schwartz (mail):
The correct defense here isn't laches, but practical construction. By accepting $35,000 in payment for so long, the parties basically clarified, amended, or evidenced that their agreement was for a payment of $35,000 in value, not the market value of $35,000 in gold pieces.
There was a novation, and the terms of the contract explicitly said that upon a novation, the new lessee takes on all the requirements specified in the original contract, not just those currently being complied with.

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.
8.29.2008 11:41am
David Chesler (mail) (www):
I didn't quite buy it at the time it was applied to rent-controlled properties, but in terms of fairness, nobody alive is still hurt by the lease, or that a property went under rent control 50 years ago: The original lessor got screwed, so the theory goes, when he sold the encumbered property to the current owner (or the second in a chain of owners.)

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.)
8.29.2008 1:00pm