Opinion ID: 391956
Heading Depth: 4
Heading Rank: 1

Heading: Impairment of Contractual Obligations

Text: 18 The obligation of a contract is 'the law which binds the parties to perform their agreement.' Sturges v. Crowinshield, 4 Wheat. 122, 197, 4 L.Ed. 529, 549. Home Building & Loan Assoc. v. Blaisdell, 290 U.S. 398, 429, 54 S.Ct. 231, 236, 78 L.Ed. 413 (1934). Thus the laws which existed at the time the contract was entered into and which affect its validity, construction, discharge and enforcement, in effect, are incorporated within the contract. Id. at 429-430, 54 S.Ct. at 236-237. However, while the remedy may be an integral part of the contract, a state may change or modify the form of the remedy, provided that no substantial right is impaired. Thus, it was determined by the Supreme Court that no substantial question under the contracts clause was presented where a statute, enacted after the formation of the contract, required that the right to a deficiency judgment be determined in the foreclosure suit. Honeyman v. Hanan, 302 U.S. 375, 378, 58 S.Ct. 273, 274, 82 L.Ed. 312 (1937). On the other hand, where a state's constitution created a homestead exemption, the Court determined that the exemption could not be applied retroactively because it would so affect the remedy of the creditor as to substantially impair and lessen the value of the contract. Edwards v. Kearzey, 96 U.S. 595, 24 L.Ed. 793 (1878). Similarly, in W. B. Worthen v. Thomas, 292 U.S. 426, 54 S.Ct. 816, 78 L.Ed. 1344 (1934), a statute which exempted insurance proceeds from the claims of creditors was held to violate the contract clause as the judgment and garnishment procedures provided appropriate means to enforce the contractual obligations and the retroactive application of the exemption altered substantial rights. See also, Medical Finance Association v. Wood, 20 Cal.App.2d Supp. 749, 63 P.2d 1219 (1936) (newly-created automobile exemption could not be applied retroactively as it would take away a right which existed at the time the contract was created); Bassin, supra, (retroactive application of a $10,000 increase in the California homestead exemption unconstitutionally impairs pre-existing contractual obligations). 19 Here, the exemption under section 690.235 protected the dwelling home of the debtor to the same extent and in the same amount as the debtor would have been entitled to select through a declaration of homestead. However, differences between the two exemptions exist. The homestead exemption, which preceded the dwelling home exemption, could only be claimed if a declaration of homestead had been filed prior to the recordation of an abstract of judgment by a creditor. Where a homestead had not been previously declared, a judgment lien could attach and was enforceable as against that real property. 20 The exemption under section 690.235 required no prior filing. After a writ of execution had been levied upon his dwelling home, the debtor could then assert the dwelling home exemption to prevent execution of the writ. A recorded abstract of judgment which normally would become a judgment lien on real property which had not been protected under a homestead declaration could not attach to real property which qualified under section 690.235. 5 21 There is no question that appellees had not made a timely declaration of homestead. Under the law existing at the time the contractual relationship was entered into, a judgment lien would have attached upon the real property when the Credit Union recorded its abstract of judgment and the appellees' property would have thereafter been subject to execution. However, the retroactive application of section 690.235 exempted the appellees' property from execution. 22 It is quite clear that had the homestead exemption not previously existed, the concept of the section 690.235 exemption would have been entirely new and its enactment and application would have presented a contract impairment situation identical to W. B. Worthen v. Thomas, Edwards v. Kearzey, and Medical Finance Ass'n v. Wood. Although the circumstances are not identical, we believe those precedents are nevertheless controlling. The net effect of section 690.235 was the creation of a new automatic exemption for dwelling homes where, previously, a timely declaration of homestead was required. Although the exemptions are similar, we believe that the differences and their results are significant. Under the circumstances of this case, we believe section 690.235 substantially impaired the pre-existing contractual obligations of the parties. We must therefore determine whether governmental interests justified the impairment. 23