Rudolph v. Steinhardt

• Decision Date: 27 December 1983
• Docket Number: No. 82-5647,82-5647
• Citation: 721 F.2d 1324
• Parties: Milton RUDOLPH, et al., Plaintiffs-Appellees, v. Milton F. STEINHARDT, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1324

721 F.2d 1324

Milton RUDOLPH, et al., Plaintiffs-Appellees, v. Milton F. STEINHARDT, et al., Defendants-Appellants.

No. 82-5647.

United States Court of Appeals Eleventh Circuit.

Dec. 27, 1983.

Blackwell, Walker, Gray, Powers, Flick & Hoehl, Diane H. Tutt, James C. Blecke, Miami, Fla., for defendants-appellants.

Hyman & Kaplan, P.C., Michael L. Hyman, Miami, Fla., for plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before GODBOLD, Chief Judge, ANDERSON, Circuit Judge, and GOLDBERG ^*, Senior Circuit Judge.

GOLDBERG, Senior Circuit Judge:

In 1849, the cry of "Gold!" rang out from the banks of the American River in California. In 1933, the halls of Congress echoed with a ban on gold clauses in American contracts. ¹ Our case involves a modern prospector, panning for security in the rivulets of commerce. His tool is a lease provision that increases rent payments in proportion to official devaluations of the United States dollar. We hold that he has struck gold; but, alas, he cannot keep it. The rent provision is a gold clause and therefore violative of 31 U.S.C. Sec. 463. Moreover, although Congress amended the statute on October 28, 1977, ² we hold that the lease provision is invalid even with respect to rental payments due after that date. The lease was entered into before 1977 and consequently does not come within the terms of the amendment.

I. HISTORICAL BACKGROUND

Although the history of gold clauses and the United States gold standard does not directly affect our resolution of this case, it is helpful to see the whole historical terrain before we descend into our particular mine shaft. The monetary basis of the United States went through several metamorphoses during the nineteenth century; but in 1879, the nation finally settled on an "international gold standard." ³ Gold reserves backed up the paper currency, so that a person could redeem paper currency and receive gold coin. In 1900, Congress established an official value of the dollar in terms of gold. One dollar equalled twenty-five and eight-tenths grains of gold nine-tenths fine." ⁴ One could exchange paper money for gold of that weight and fineness. Put differently, the "official price" of one fine troy ounce of gold was set at $20.67. As a natural consequence of these acts, the money supply in the United States was limited by gold reserves.

When Franklin Roosevelt took office in 1933, he wished to inflate domestic prices and increase the money supply. Therefore, he took the United States off the gold standard. ⁵ Citizens could no longer demand gold from the U.S. Treasury in exchange for paper bills. At the same time, Roosevelt officially devalued the dollar, ⁶ proclaiming a new gold content of 15 5/21 grains nine-tenths fine. ⁷ The official price of gold rose correspondingly from $20.67 to $35.00 per ounce. An official price was still meaningful, because the Treasury could buy gold from citizens in exchange for paper currency. Indeed, all gold coin was to be withdrawn from circulation. ⁸

Other elements of Roosevelt's monetary program were a ban on gold hoarding ⁹ and the invalidation of gold clauses in contracts. As we shall discuss later, a gold clause is a provision requiring "payment in gold or a particular kind of currency, or in an amount of money measured thereby." ¹⁰ One purpose of the Joint Resolution banning such clauses was to prevent creditors from enforcing the clauses after the 1934 devaluation of the dollar. ¹¹ A second purpose, according to the Supreme Court, was to ensure that future debt payments would not fluctuate relative to the value of the paper dollar. ¹²

The United States ceased to buy and sell gold in 1971 but continued to maintain an official price. ¹³ A dollar devaluation on May 8, 1972, increased the official price of gold to $38 per ounce. A second devaluation on October 18, 1973, brought the official price to $42.22 per ounce. ¹⁴

The anti-gold clause era ended in 1977. An amendment to section 463 declared that the section "shall not apply to obligations issued on or after the date of enactment of this section [Oct. 28, 1977]." ¹⁵

II. FACTS

A. The Miner's Saga

Returning to the case at bar, our prospector is Milton F. Steinhardt, the developer of a condominium apartment project in North Miami Beach, Florida. The project is known as the Eastern Shores White House. For business reasons, title to the land is held in trust with Gladys Goldman--an employee of Steinhardt--as trustee.

On March 2, 1970, Goldman and Steinhardt entered into a 99-year ground lease, with Goldman as lessor and Steinhardt as lessee. The lease permitted Steinhardt to assign a pro-rata interest in the lease to each apartment owner as the units were sold. Upon purchase of an apartment and assignment of the lease interest, the individual unit owner would become liable for a pro-rata portion of the rental payments under the lease.

The lease contains a schedule of rental payments, payable quarterly and varying in amount from $90 to $135 per quarter depending upon the size of the apartments. In addition, the lease contains a clause that provides:

DEVALUATION: In the event that the United States Dollar should ever be officially devalued by the United States Government or replaced by a regular specie of a lesser value, then and in that event the rental to be paid by the Lessee to the Lessor or any purchase price to be paid to the Lessor by the Lessee shall be increased in proportion to said devaluation so that the rental to be paid to the Lessor or the purchase price of the property covered by this Lease to be paid to the Lessor, shall be the same in terms of actual value as the United States Dollar was on March 2, 1970.

Ground Lease, p 29, Record at 24. ¹⁶ In short, rents would be escalated in proportion to official devaluations of the dollar. Steinhardt's stated reason for including the devaluation clause was to maintain the real buying power of rents received from the unit owners. Appellant's Brief at 13-14.

He was content for a few years with the original rent levels. However, in 1974, the gold bug bit Steinhardt. He wrote to the Department of the Treasury on Dec. 2, 1974, inquiring about the percentage devaluation of the dollar since 1970. He struck pay dirt. The response from the Treasury explained that the dollar was devalued by 7.98% in 1972, and by another 10% in 1973. Steinhardt subsequently informed the unit owners that their rents would be increased, in part because of the "Gold Devaluations" of 1972 and 1973. See, e.g., Letter to Wilfred Frank, February 26, 1975, Record at 98; Letter to Joseph Nichols, August 6, 1975, Record at 100.

B. Excavations by the Trial Court

The unit owners began making the escalated payments. However, on December 5, 1978, three of the owners and their spouses brought an action against Steinhardt and Goldman in the United States District Court for the Southern District of Florida. The plaintiffs sued as individuals and as representatives of the class of unit owners. They challenged the escalation provision, inter alia, as a "gold clause" violating section 463.

The district court ruled in their favor and awarded damages in an amount equal to the sum illegally collected by the defendants pursuant to the devaluation clause, prior to October 28, 1977. The trial court initially permitted the defendants to escalate rents due on or after October 28, 1977. That holding was based on the 1977 amendment to Section 463. ¹⁷ In a subsequent order, however, the court amended its Conclusions of Law and held that the lease obligation was issued prior to October 28, 1977. Therefore, the escalation of any rents pursuant to the devaluation clause was unlawful; and the plaintiffs could recover all monies collected in violation of section 463. The defendants Steinhardt and Goldman [hereinafter referred to collectively as "Steinhardt"] took an appeal from that judgment.

III. DISCUSSION

A. Section 463

Section 463 provides in pertinent part:

(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 currency, or in an amount in money of the United States measured thereby, is declared to be against public policy; and no such provision 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.....

(b) As used in this section, the term "obligation" means an obligation payable in money of the United States....

31 U.S.C. Sec. 463 (1976). ¹⁸

B. There's Gold In Them Thar Bills

A straightforward application of the statute convinces us that the devaluation provision in Steinhardt's ground lease is a gold clause. As mentioned, devaluation of the dollar occurs when the government increases the official price of gold. ¹⁹ The provision in the Steinhardt lease escalates rental payments in proportion to such devaluations. The payments represent the same number of ounces of gold (as determined by the official price) as they did on March 2, 1970. The value of each payment is, in effect, measured by a quantity of gold. Section 463 forbids

[e]very provision which purports to give the obligee a right to require payment in ... an amount of money of the United States measured [by gold].

31 U.S.C. Sec. 463. Therefore, the statute on its face proscribes Steinhardt's devaluation clause. ²⁰

Our prospector responds, however, that we are confusing iron pyrite with true gold. Steinhardt argues that the devaluation clause is not within section 463, because the clause keys rental payments to the official price of gold rather than the market price. He claims...