Opinion ID: 1548590
Heading Depth: 2
Heading Rank: 2

Heading: Reasonable and Necessary Legislation

Text: Because the Act substantially impairs the policyholders' contracts with the JUA, it technically violates Part I, Article 23 of the State Constitution. Nevertheless, it is to be accepted as a commonplace that the Contract Clause does not operate to obliterate the [State's] police power. . . . Furlough, 135 N.H. at 634, 609 A.2d 1204 (quotation omitted). It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the State from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected. This power, which in its various ramifications is known as the police power, is an exercise of the sovereign right of the Government to protect the lives, health, morals, comfort and general welfare of the people, and is paramount to any rights under contracts between individuals. Allied Structural Steel, 438 U.S. at 241, 98 S.Ct. 2716 (quotation omitted). If the Contract Clause is to retain any meaning at all, however, it must be understood to impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power. Id. at 242, 98 S.Ct. 2716 (emphasis omitted). Thus, a balancing of the police power and the rights protected by the contract clauses must be performed, and a bill or law which substantially impairs a contractual obligation may pass constitutional muster only if it is reasonable and necessary to serve an important public purpose. Furlough, 135 N.H. at 634, 609 A.2d 1204 (quotation omitted). We must consider whether the [State's] proposed justification in fact serves public interests and whether its mechanisms to serve those interests reflect reasonable and necessary choices. Mercado-Boneta, 125 F.3d at 15. We first examine whether the law serves an important public purpose. The Act requires that the funds be used for the purpose of supporting programs that promote access to needed health care for underserved persons. Laws 2009, 144:1, I. Protection of the health of the people of New Hampshire is certainly a legitimate and important goal. However, the finding of a significant and legitimate public purpose is not, by itself, enough to justify the impairment of contractual obligations. Keystone Bituminous Coal Assn. v. DeBenedictis, 480 U.S. 470, 505, 107 S.Ct. 1232, 94 L.Ed.2d 472 (1987). Although deference is due to the legislature, and weight is given to the legislature's own statement of purposes for the law, a court must undertake its own independent inquiry to determine the reasonableness of the law and the importance of the purpose behind it. Mercado-Boneta, 125 F.3d at 13. Accordingly, we examine whether the Act, despite its substantial impairment of contract rights, is reasonable and necessary to accomplish the stated public purpose. In assessing the reasonableness and necessity of the Act, the threshold question is the degree of deference we must afford the legislature's decision as to the means chosen to accomplish its purpose. The general rule is that, [u]nless the State itself is a contracting party, `as is customary in reviewing economic and social regulation, courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.' Furlough, 135 N.H. at 634-35, 609 A.2d 1204 (quotation, brackets and ellipses omitted). This deference serves to ensure that the constitutional prohibition against the impairment of contracts does not prevent the State from legitimate exercises of police power to protect the vital interests of its people. W.B. Worthen Co. v. Thomas, 292 U.S. 426, 432-33, 54 S.Ct. 816, 78 L.Ed. 1344 (1934). As the United States Supreme Court has noted, The exercise of that reserved power has repeatedly been sustained by this Court as against a literalism in the construction of the contract clause which would make it destructive of the public interest by depriving the State of its prerogative of self-protection. Id. at 433, 54 S.Ct. 816. The Supreme Court has also held, however, that this essential reserved power of the State must be construed in harmony with the fair intent of the constitutional limitation, and that this principle preclude[s] a construction which would permit the State to adopt as its policy . . . the destruction of contracts or the denial of means to enforce them. Id. In cases where the State is itself a party to the contract, heightened review is warranted and courts generally accord minimal deference to legislative acts affecting such contracts. See, e.g., Lower Village, 147 N.H. at 78, 782 A.2d 897; see also Furlough, 135 N.H. at 635, 609 A.2d 1204 (When a State itself enters into a contract, it cannot simply walk away from its financial obligations. In almost every case, the Court has held a governmental unit to its contractual obligations when it enters financial or other markets. (quotation omitted)); National R. Passenger Corp. v. A.T. & S.F.R. Co., 470 U.S. 451, 472 n. 24, 105 S.Ct. 1441, 84 L.Ed.2d 432 (1985) ([T]he Court has observed that in order to maintain the credit of public debtors, and because the State's self-interest is at stake, the Government's impairment of its own obligations perhaps should be treated differently. (quotations and citations omitted)). We make no ruling as to whether the policyholders' contracts with the JUA constitute State contracts. We note, however, that the State's underlying justification for transferring funds from the JUA to the general fund is based upon the State's assertion that the JUA is part of the State. If we were to assume, for the purposes of analysis, that the JUA is part of the State, then the petitioners' participating policies would be public contracts. The Act, which interferes with those contracts, would therefore be subject to the heightened standard of review we applied in Furlough and Lower Village. We invalidated the legislation in those cases as unconstitutional, reasoning that financial necessity, though superficially compelling, has never been sufficient of itself to permit states to abrogate contracts. Lower Village, 147 N.H. at 78, 782 A.2d 897 (brackets omitted) (quoting Furlough, 135 N.H. at 635, 609 A.2d 1204). Although less deference does not imply no deference to the legislature's determination of reasonableness and necessity, Buffalo Teachers, 464 F.3d at 370, [t]he [C]ontract [C]lause, if it is to mean anything, must prohibit the State from dishonoring its existing contractual obligations when other policy alternatives are available, Furlough, 135 N.H. at 635-36, 609 A.2d 1204 (quotation and brackets omitted). If governments could reduce their financial obligations whenever an important public purpose could be conceived for repudiating a contract[,] the Contract Clause would provide no protection at all. Id. at 635, 609 A.2d 1204 (quotations omitted). If, as the State contends, the JUA is a part of the State, less deference to legislative judgment is warranted. If, on the other hand, the JUA is a private entity, as found by the trial court, more deference is warranted, but complete deference is unsupportable. As we have previously held, the [C]ontract [C]lause is not a dead letter and does impose some limits upon the power of a State to abridge existing contractual relationships, even in the exercise of its otherwise legitimate police power. Smith Insurance, Inc. v. Grievance Committee, 120 N.H. 856, 863, 424 A.2d 816 (1980) (quotations omitted). For the Contract Clause to retain any vitality, we must be able to consider the reasonableness and necessity of the legislature's chosen action, particularly where the action's substantial impairment of contract rights inures to the State's financial benefit. [T]he absence of a contract with the state does not mean we thereby believe the [contract-impairing legislation] cannot be self-serving to the state. To the contrary, it can be. Buffalo Teachers, 464 F.3d at 370; see also Mercado-Boneta, 125 F.3d at 16 (the real issue in determining the level of deference given to a legislative determination of reasonableness and necessity is not so much whether the state is arguably a nominal party to the contract, but whether the state is acting in its own pecuniary or self-interested capacity). The better rule therefore calls for focusing on whether the contract-impairing law is self-serving, where existence of a state contract is some indicia of self-interest, but the absence of a state contract does not lead to the converse conclusion. Buffalo Teachers, 464 F.3d at 370. Here, given the nature and effect of the Act, we conclude that the State's self-interest is at stake. Accordingly, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake. A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all. Furlough, 135 N.H. at 635, 609 A.2d 1204 (quotation omitted). We note also that the United States Supreme Court has distinguished the deference accorded state, as opposed to federal, legislation: When the court reviews state economic legislation the inquiry will not necessarily be the same [as a deferential review of federal economic legislation]. . . . [W]e have never held that the principles embodied in the Fifth Amendment's due process guarantee are coextensive with the prohibitions against state impairment of contracts under the Contract Clause, and, we observed, to the extent the standards differ, a less searching inquiry occurs in the review of federal economic legislation. National R. Passenger Corp., 470 U.S. at 472-73 n. 25, 105 S.Ct. 1441; see also Nieves v. Hess Oil Virgin Islands Corp., 819 F.2d 1237, 1251 (3d Cir.1987) (contrasting limitations imposed on States by the Contract Clause with the less searching standards imposed on [federal] economic legislation by the Due Process Clauses) (quotation and emphasis omitted). Thus, [d]espite the customary deference courts give to state laws directed to social and economic problems, legislation adjusting the rights and responsibilities of contracting parties must be upon reasonable conditions and of a character appropriate to the public purpose justifying its adoption. Allied Structural Steel, 438 U.S. at 244, 98 S.Ct. 2716 (quotation and brackets omitted). Moreover, the State bears the burden of proving that the contract impairment is reasonable and necessary, since it asserts the benefit of its own statute. In re Seltzer, 104 F.3d 234, 236 (9th Cir.1996); see also Univ. of Hawaii Professional Assembly v. Cayetano, 183 F.3d 1096, 1106 (9th Cir.1999), injunction dissolved, 125 F.Supp.2d 1237, 1242-43 (D.Haw.2000). While the Act's stated purpose is to provide funds to support programs that promote access to needed health care for underserved persons, Laws 2009, 144:1, I, it does not constitute broad-based social or economic regulation directed to meet a societal need. Rather, the Act singularly targets for transfer to the State's general fund discrete funds generated by premiums paid by a discrete class of private parties. Compare Buffalo Teachers, 464 F.3d at 368-69 (upholding legislation imposing a generally applicable public employee wage freeze), with Ass'n of Sur. & Sup.Ct. Rptrs. v. State, 79 N.Y.2d 39, 580 N.Y.S.2d 153, 588 N.E.2d 51, 54 (1992) (striking down legislation as unconstitutional where it imposed a payroll lag upon a narrow class of State employees); see also Exxon Corp. v. Eagerton, 462 U.S. 176, 192, 103 S.Ct. 2296, 76 L.Ed.2d 497 (1983) (noting that the statute at issue in Allied Structural Steel applied so narrowly that its sole effect was to alter contractual duties); Allied Structural Steel, 438 U.S. at 247-49, 98 S.Ct. 2716. The Act's funding scheme is qualitatively different from social or economic regulatory legislation which establishes a broad-based mechanism for addressing a public need. The State offers two justifications for the Act. First, the State contends that [t]he Act furthers the public purpose of the JUA by avoiding distortions of the market that would inevitably flow from the distributions sought by petitioners, because such distributions have the potential to disrupt the voluntary market by reducing the price of JUA insurance and creating an incentive for providers to move to the JUA. In rejecting the identical argument, the trial court observed: This argument is based on the unwarranted assumption that if the State does not get the $110 million, the policyholders will . . . thus receiv[e] a windfall. As the Court made clear at the outset of the . . . hearing, it has no authority, and will not attempt, to order any distribution of the surplus funds. Dividends can only be distributed pursuant to the procedures contained in the policy and regulations: by request of the JUA board and approval of the Commissioner. We likewise reject this argument. What the policyholders stand to gain by our ruling is the enforcement of their contract rights to the application of any excess surplus for their benefit in one or both of the ways specified by the regulations incorporated into their policies. The question of whether the JUA board should make distributions of any excess surplus is not before us, and we express no opinion on that issue. Second, the State contends that the purpose of the Act is much more than merely financial, asserting that the legislature reasonably concluded that the excess surplus [in the JUA fund] would be more useful in promoting access to health care through state programs for the medically underserved than if the funds remained `trapped' in the JUA or were distributed to those providers that happen to be insured through the JUA. Although funding state programs for the medically underserved is an important public purpose, we conclude that the Act is not appropriately tailored to serve that purpose. First, it is not clear that all of the $110 million is in fact excess surplus. Although a risk-based capital estimate was prepared for the JUA, the JUA board made no determination as to the amount of any excess surplus. Under these circumstances, any assessment of the reasonableness of the amount subject to transfer is questionable. Further, the State has not suggested, and nothing in the record indicates, that the Act was precipitated by an emergency, or that it constitutes a temporary measure, with future reimbursement of the funds contemplated. See, e.g., Garris v. Hanover Ins. Co., 630 F.2d 1001, 1008 (4th Cir.1980) (in evaluating the reasonableness and necessity of challenged legislation, court examines: (1) [the legislation's] emergency nature; (2) its purpose to protect a broad societal interest, not a favored group; (3) the tailoring of its remedial effect to its emergency cause; (4) the reasonableness of its basic features; and (5) its limited effect in temporal terms.). Nor does the record reflect that other avenues of funding, which do not substantially interfere with the policyholders' contracts, have been exhausted, or even considered. See Buffalo Teachers, 464 F.3d at 371 (Only after . . . more drastic steps were taken and a finding that the freeze was essential was made, did the [governmental authority] institute the wage freeze.); Fraternal Order of Police, 645 F.Supp.2d at 510-18 (examining various factors to determine reasonableness and necessity, including efforts to exhaust numerous alternatives before resorting to legislation that substantially impaired a contract). Thus, we cannot conclude that the means chosen to accomplish the Act's stated purpose are reasonable and necessary. Our conclusion rests upon the retroactive effect of the Act; if the legislature had addressed policyholders' rights prospectively that is, effective upon issuance of new policiesour analysis would of necessity be different. See Chu, 569 N.Y.S.2d 364, 571 N.E.2d at 678. To be sure, the Act expediently accomplishes the legislature's stated purpose of supporting programs that promote access to needed health care. But such expediency does not, in and of itself, render the transfer of these funds reasonable and necessary. The legislature has other reasonable alternatives to accomplish its goal, including amending the rights and responsibilities under newly-issued JUA policies. As there is no showing in the record before us that this severe disruption of contractual expectations was necessary to meet an important general social problem[, t]he presumption favoring legislative judgment as to the necessity and reasonableness of a particular measure, simply cannot stand in this case. Allied Structural Steel, 438 U.S. at 247, 98 S.Ct. 2716 (quotation and citation omitted; emphasis added).