U.S. Supreme Court LYNCH v. U.S., 292 U.S. 571 (1934)

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First. War Risk Insurance policies are contracts of the United States. As consideration for the government's obligation, the insured paid prescribed monthly premiums. White v. United States, 270 U.S. 175, 180, 46 S.Ct. 274. True, these contracts, unlike others, were not entered into by the United States for a business purpose. The policies granted insurance against death or total disability without medical examination, at net premium rates based on the american Experience Table of Mortality and 3 1/2 per cent. interest; the United States bearing both the whole expense of administration and the excess mortality and disability cost resulting from the hazards of war. In order to effect a benevolent purpose, heavy burdens were assumed by the Government. [Footnote 2] But the policies, although not entered into for gain, are legal obligations of the same dignity as other contracts of the United States and possess the same legal incidents.

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mentally in legal incidents. Pensions, compensation allowances, and privileges are gratuities. They involve no agreement of parties; and the grant of them creates no vested right. The benefits conferred by gratuities may be redistributed or withdrawn at any time in the discretion of Congress. United States v. Teller, 107 U.S. 64, 68, 2 S.Ct. 39; Frisbie v. United States, 157 U.S. 160, 166, 15 S.Ct. 586; United States v. Cook, 257 U.S. 523, 527, 42 S.Ct. 200. On the other hand, war risk policies, being contracts, are property and create vested rights. The terms of these contracts are to be found in part in the policy, in part in the statutes under which they are issued and the regulations promulgated thereunder.

In order to promote efficiency in administration and justice in the distribution of war risk insurance benefits, the administration was given power to prescribe the form of policies and to make regulations. The form prescribed provided that the policy should be subject to all amendments to the original act, to all regulations then in force or thereafter adopted. Within certain limits of application, this form was deemed authorized by the act, White v. United States, 270 U.S. 175, 180, 46 S.Ct. 274, and, as held in that case, one whose vested rights were not thereby disturbed could not complain of subsequent legislation affecting the terms of the policy. Such legislation has been frequent. [Footnote 3] Moreover, from time to time, privileges granted

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were voluntarily enlarged and new ones were given by the government. 4 But no power to curtail the amount of the benefits which Congress contracted to pay was reserved to Congress; and none could be given by any regulation promulgated by the Administrator. Prior to the Economy Act, no attempt was made to lessen the obligation of the government. [Footnote 5] Then, Congress, by a clause of thirteen words included in a very long section dealing with gratuities, repealed 'all laws granting or pertaining

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to yearly renewable term insurance.' The repeal, if valid, abrogated outstanding contracts and relieved the United States from all liability on the contracts without making compensation to the beneficiaries.

Second. The Fifth Amendment commands that property be not taken without making just compensation. Valid contracts are property, whether the obligor be a private individual, a municipality, a state, or the United States. Rights against the United States arising out of a contract with it are protected by the Fifth Amendment. United States v. Central Pacific R. Co., 118 U.S. 235, 238, 6 S.Ct. 1038; United States v. Northern Pacific Ry. Co., 256 U.S. 51, 64, 67 S., 41 S.Ct. 439. When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals. [Footnote 6] That the contracts of war risk insurance were valid when made is not questioned. As Congress had the power to authorize the Bureau of War Risk Insurance to issue them, the due process clause prohibits the United States from annulling them, unless, indeed, the action taken falls within the federal police power or some other paramount power. [Footnote 7]

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which authorized Congress to abrogate these contracts in the exercise of the police or any other power. The title of the Act of March 20, 1933, repels any such suggestion. Although popularly known as the Economy Act, it is entitled an 'Act to maintain the credit of the United States.' Punctilious fulfillment of contractual obligations is essential to the maintenance of the credit of public as well as private debtors. No doubt there was in March, 1933, great need of economy. In the administration of all government business economy had become urgent because of lessened revenues and the heavy obligation to be issued in the hope of relieving widespread distress. Congress was free to reduce gratuities deemed excessive. But Congress was without power to reduce expenditures by abrogating contractual obligations of the United States. To abrogate contracts, in the attempt to lessen government expenditure, would be not the practice of economy, but an act of repudiation. 'The United States are as much bound by their contracts as are individuals. If they repudiate their obligations, it is as much repudiation, with all the wrong and reproach that term implies, as it would be if the repudiator had been a State or a municipality or a citizen.' The Sinking Fund Cases, , 719.

Third. Contracts between individuals or corporations are impaired within the meaning of the Constitution (article 1, 10, cl. 1) whenever the right to enforce them by legal process is taken away or materially lessened. [Footnote 8] A different rule prevails in respect to contracts of sovereigns. Compare Principality of Monaco v. Mississippi, 292 U.S. 313, 54 S.Ct. 745, 78 L.Ed. --, decided May 21, 1934. 'The contracts between a Nation and an individual are only binding on the conscience of the sovereign and have no

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pretensions to compulsive force. They confer no right of action independent of the sovereign will.' [Footnote 9] The rule that the United States may not be sued without its consent is all-embracing.

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Fourth. The question requiring decision is, therefore, whether in repealing 'all laws granting or pertaining to yearly renewable term insurance' Congress aimed at the right or merely at the remedy. It seems clear that it intended to take away the right; and that Congress did not intend to preserve the right and merely withdraw consent to sue the United States. [Footnote 13] As Congress took away the contractual right, it had no occasion to provide for withdrawal of the remedy. Moreover, it appears both from the language of the repealing clause and from the context of section 17 that Congress did not aim at the remedy. The clause makes no mention of consent to sue. The consent to sue had been given originally by section 405 of the Act of 1917 (40 Stat. 410) which, like the later substituted sections, applied to all kinds of insurance, making no specific reference to yearly renewable term policies. Obviously, Congress did not intend to repeal generally the section providing for suits. [Footnote 14] For, in March, 1933, most of the policies then outstanding were 'converted' policies, in no way affected by the Economy Act. [Footnote 15]

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sion, disability allowance, or retirement pay to veterans and the dependents of veterans of the Spanish-American War, including the Boxer Rebellion and the Philippine Insurrection, and the World War, or to former members of the military or naval service for injury or disease incurred or aggravated in the line of duty in the military or naval service (except so far as they relate to persons who served prior to the Spanish-American War and to the dependents of such persons, and the retirement of officers and enlisted men of the Regular Army, Navy, Marine Corps, or Coast Guard) are hereby repealed, and all laws granting or pertaining to yearly renewable term insurance are hereby repealed, but payments in accordance with such laws shall continue to the last day of the third calendar month following the month during which this chapter is enacted.' [Footnote 16]

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March 20, 1933, and on which maturity of the insurance contract had been determined by the Veterans' Administration prior to March 20, 1933, and where payments could not be made because of the provisions of the Act of March 20, 1933, or under the provisions of the Act of June 16, 1933, may be adjudicated by the Veterans' Administration, and any person found entitled to yearly renewable term insurance benefits claimed shall be paid such benefits in accordance with and in the amounts provided by such prior laws.'18

The provision in the Act of June 16, 1933, which was enacted before the entry of judgments by the district courts, does not appear to have been considered by the lower courts. The provision in the Act of March 27- 28, 1934, was enacted after the filing in this Court of the petitions for certiorari but before the writs were granted. As neither of these Acts was referred to by the Solicitor General or by counsel for the petitioners, we assume that there is nothing in them or in any action taken thereunder, which should affected the disposition of the cases now before us. Any such matter also will be open for consideration by the lower courts upon the remand.

Reversed. Footnotes

Footnote 1 Section 404 provides: 'That during the period of war and thereafter until converted the insurance shall be term insurance for successive terms of one year each. Not later than five years after the date of the termination of the war as declared by proclamation of the President of the United States, the term insurance shall be converted, without medical examination, into such form or forms of insurance as may be prescribed by regulations and as the insured may request. Regulations shall provide for the right to convert into ordinary life, twenty payment life, endowment maturing at age sixty-two and into other usual forms of insurance. ...' ( 40 Stat. 410).

Footnote 2 The disbursements to June 33, 1933, for term and automatic insurance (the latter provided for those who were permanently and totally disabled or who died within 120 days after entrance into the service and before making application for term insurance) exceeded the premium receipts by $4,166,939,057. Administrator of Veterans' Affairs, Report for Year 1933, p. 28. The annual cost of administration was estimated at $1, 744,038.56. Report of United States Veterans' Bureau for 1922, p. 465. War risk insurance was devised in the hope that it would, in large measure, avoid the necessity of granting pensions. Term insurance was issued at a very low premium rate. Over 4,684,000 persons applied before the Armistice to the amount of about $40,000,000,000 for war risk term insurance; but over 75 per cent. of the men who carried term insurance while in the service never paid a premium after the war. See Report of Bureau of War Risk Insurance for 1920, pp. 5, 7, 41; Report of United States Veterans' Bureau for 1922, p. 456; for 1925, p. 268.

Footnote 3 Extension of class of beneficiaries, Acts of June 25, 1918, c. 104 , 2, 40 Stat. 609; Dec. 24, 1919, c. 16, 2, 3, 4, 13, 41 Stat. 371, 375; Aug. 9, 1921, c. 57, 23, 42 Stat. 147, 155; May 29, 1928, c. 875, 13, 45 Stat. 964, 967 (38 USCA 511). Upheld, White v. United States, 270 U.S. 175, 46 S.Ct. 274.

Payment where beneficiary dies before exhaustion of policy, e.g., Dec. 24, 1919, c. 16, 15, 16, 41 Stat. 371, 376; Aug. 9, 1921, c. 57, 26, 42 Stat. 147, 156; June 7, 1924, c. 320, 26, 43 Stat. 607, 614 (38 USCA 451).

Payment where beneficiary incompetent, e.g., Dec. 24, 1919, c. 16, 5, 41 Stat. 371; March 2, 1923, c. 173, 1, 42 Stat. 1374; July 2, 1926, c. 723, 2, 44 Stat. 790, 791 (see 38 USCA 450).

Footnote 4 Reinstatement of lapsed policies, Aug. 9, 1921, c. 57, 27, 42 Stat. 147, 156; March 4, 1923, c. 291, 7, 42 Stat. 1521, 1525; July 2, 1926, c. 723, 15, 17, 44 Stat. 790, 799, 800.

Liability undertaken on certain policies which have lapsed through failure of payment of premiums, been canceled by surrender or estoppel of later contract, e.g., Dec. 24, 1919, c. 16, 12, 41 Stat. 371, 374; Aug. 9, 1921, c. 57, 27, 42 Stat. 147, 156; July 3, 1930, c. 849, 24, 46 Stat. 991, 1001 (38 USCA 518).

Incontestability in favor of insured, Aug, 9, 1921, c. 57, 30, 42 Stat. 147, 157; July 3, 1930, c. 849, 24, 46 Stat. 499, 1001 (38 USCA 518).

Administration may waive time for premium payment, grant various tolerances, Aug. 9, 1921, c. 57, 24, 28, 42 Stat. 147, 155, 157; March 4, 1923, c. 291, 8, 42 Stat. 1521, 1526.

Proceeds exempted from taxation, June 25, 1918, c. 104, 2, 40 Stat. 609.

The War isk Insurance Act provided for the conversion of yearly renewable term insurance into level premium insurance at any time within five years from the date of the termination of the war; and the World's War Veterans' Act of June 7, 1924, c. 320, 304, 43 Stat. 607, 625, provided that all yearly renewable term insurance should cease on July 2, 1926. But provision for extending the period for conversion and for reinstatement were made by later statutes and by regulations issued thereunder, June 2, 1926, c. 449, 44 Stat. 686; May 29, 1928, c. 875, 14, 45 Stat. 964, 968; July 3, 1930, c. 849, 22, 46 Stat. 991, 1001; June 24, 1932, c. 276, 47 Stat. 334 (38 USCA 512). See Reports of United States Veterans' Bureau for 1926, pp. 54-56; for 1927, pp. 23-25; Reports of Administrator of Veterans' Affairs for 1931, p. 32; for 1932, p. 42; for 1933, p. 28.

Footnote 5 But compare Acts of June 25, 1918, c. 104, 2, 40 Stat. 609; Aug. 9, 1921, c. 57, 15, 42 Stat. 147, 152; March 4, 1923, c. 291, 1, 42 Stat. 1521; March 4, 1925, c. 553, 3, 43 Stat. 1302, 1303 (38 USCA 447).

Footnote 6 Compare United States v. Bank of the Metropolis, 15 Pet. 377, 392; The Floyd Acceptances, 7 Wall. 666, 675; Garrison v. United States, 7 Wall. 688, 690; Smoot's Case 15 Wall. 36, 47; Vermilye v. Adams Express Co., 21 Wall. 138, 144; Cooke v. United States, 91 U.S. 389, 396; United States v. Smith, 94 U.S. 214, 217; Hollerbach v. United States, 233 U.S. 165, 171, 34 S.Ct. 553; Reading Steel Casting Co. v. United States, 268 U.S. 186, 188, 45 S.Ct. 469; United States v. National Exchange Bank, 270 U.S. 527, 534, 46 S. Ct. 388.

Footnote 7 Compare Lottery Case, , 23 S.Ct. 321; Hipolite Egg Co. v. United States, 220 U.S. 45, 58, 31 S.Ct. 364; Hoke v. United States, 227 U.S. 308, 323, 33 S.Ct. 281, 43 L.R.A.(N.S.) 906, Ann. Cas. 1913E, 905; Hamilton v. Kentucky Distilleries & Warehouse Co., , 40 S.Ct. 106; Calhoun v. Massie, 253 U.S. 170, 175, 40 S.Ct. 474; Compare Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 430, 54 S.Ct. 231, 88 A.L.R. 1481.

Footnote 8 See Worthern Co. v. Thomas, , 54 S.Ct. 816, 78 L.Ed. --, decided May 28, 1934, and cases cited by Mr. Justice Sutherland in Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 88 A.L.R. 1481.

Footnote 9 Hamilton, The Federalist, No. 81.

Footnote 10 See Sixth, infra, p. 587.

Footnote 11 The provision for suit was later modified. See World War Veterans' Act 1924, 19, as amended by Act of July 3, 1930, c. 849, 4, 46 Stat. 991, 992 (38 USCA 445), under while these suits were brought.

Footnote 12 Compare, also, Imhoff-Berg Silk Dyeing Co. v. United States (D.C.) 43 F. (2d) 836, 841; Synthetic Patents Co. v. Sutherland (C.C.A.) 22 F.(2d) 491, 494; Kogler v. Miller (C.C.A.) 288 F. 806.

Footnote 13 Veteran Regulation No. 8, promulgated March 31, 1933, pursuant to this act, provides: 'V. Except as stated above (matter not here relevant) no payment may hereafter be made under contracts of yearly renewable term insurance (including automatic insurance) and all pending claims or claims hereafter filed for such benefits shall be disallowed.'

Footnote 14 See note 11.

Footnote 15 The number of 'converted policies in force June 30, 1933, was 616, 069. Administrator of Veterans' Affairs, Report for 1933, pp. 25, 27.

Footnote 16 The rest of the section is as follows:'The Administrator of Veterans' Affairs under the general direction of the President shall immediately cause to be reviewed all allowed claims under the above referred to laws and where a person is found entitled under this chapter, authorize payment or allowance of benefits in accordance with the provisions of this chapter commencing with the first day of the fourth calendar month following the month during which this chapter is enacted and notwithstanding the provisions of section 9 ( section 709) of this chapter, no further claim in such cases shall be required: Provided, That nothing contained in this section shall interfere with payments heretofore made or hereafter to be made under contracts of yearly renewable term insurance which have matured prior to the date of enactment of this chapter and under which payments have been commenced, or on any judgment heretofore rendered in a court of competent jurisdiction in any suit on a contract of yearly renewable term insurance, or which may hereafter be rendered in any such suit now pending: Provided further, That, subject to such regulations as the President may prescribe, allowances may be granted for burial and funeral expenses and transportation of the bodies (including preparation of the bodies) of deceased veterans of any war to the places of burial thereof in a sum not to exceed $107 in any one case.' (38 USCA 717)'The provisions of this chapter shall not apply to compensation or pension (except as to rates, time of entry into active service and special statutory allowances), being paid to veterans disabled, or dependents of veterans who died, as the result of disease or injury directly connected with active military or naval service (without benefit of statutory or regulatory presumption of service connection) pursuant to the provisions of the laws in effect on the date of enactment of this Act (March 20, 1933 ). The term 'compensation or pension' as used in this section shall not be construed to include emergency officers' retired pay referred to in section 10 (section 710) of this chapter.' (38 USCA 718).

Footnote 17 Compare Veteran Regulation No. 8, March 31, 1933.

Footnote 18 See instructions issued April 11, 1934, by the Administrator of Veterans' Affairs, pursuant to the Act of March 27, 28.