Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil Action No. 91-02600). (D.C. Civil Action No. 89-08172).
Present: Hutchinson and Scirica, Circuit Judges, and Standish, District Judge*fn*
HUTCHINSON, Circuit Judge.
These three appeals all arise out of a dispute over a commercial lease ("Lease") between Arnold T. and Myron J. Berman t/a H.P. Realty ("Bermans" or "Landlord"), commercial landlords who rent office space in Philadelphia, and one of their tenants, Jordan Mitchell, Inc. (sometimes the "Tenant"), an architectural firm. In the course of that dispute, the Bermans' attorneys invoked a confession of judgment clause in a form lease executed by the Tenant's predecessor causing the Prothonotary of the Philadelphia Court of Common Pleas to enter judgment against the Tenant for rents the Bermans claim Jordan Mitchell, Inc. owes. On the judgment, the Sheriff of Philadelphia garnished Jordan Mitchell, Inc.'s checking account without prior notice or hearing.
Jordan Mitchell, Inc. ultimately succeeded in opening the judgment, but the underlying dispute over the rent they owe is still pending in the state court. In the meantime, Jordan Mitchell, Inc. and its stockholders also filed a civil action in the United States District Court for the Eastern District of Pennsylvania. In it, they claimed Pennsylvania's practice on the entry of judgments by confession and the practice of execution on them without prior notice or hearing is actionable under 42 U.S.C.A. § 1983 (West 1981) because it violates the Fourteenth Amendment's requirement of procedural due process. They also claimed that other acts the Bermans had taken against Jordan Mitchell, Inc. and other tenants who rented from them violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.A. §§ 1961-1968 (West 1984 & Supp. 1993).
While the federal action against the Bermans was still pending, Jordan Mitchell, Inc. and its stockholders filed a separate section 1983 action against the Bermans' attorneys, the law firm of Fox, Rothschild, O'Brien & Frankel ("Fox Rothschild" or "Attorneys"). The district court dismissed both actions after holding Pennsylvania's procedure for execution on confessed judgments does violate due process but that the Bermans and the Attorneys were entitled to qualified immunity as a matter of law.
Preliminarily, in Jordan v. Fox, Rothschild, O'Brien & Frankel, 787 F. Supp. 471, 482 (E.D. Pa. 1992) ("Fox Rothschild I "), the district court had held the individual stockholders lacked standing to assert their claims because they had not alleged or shown any injury independent of the corporation. It also denied the stockholders' motion to amend their complaint to allege facts tending to show that the shareholders had become the real parties in interest on their corporation's claims under the terms of the sale of the corporation or its assets.*fn1
Specifically, Jordan Mitchell, Inc. and its stockholders appeal an order of the district court granting the Bermans' Rule 56 motion for summary judgment. In the action against the Attorneys, Jordan Mitchell, Inc. and its stockholders appeal an order granting Fox Rothschild's Rule 12(b)(6) motion.
At Docket No. 92-1435, Jordan Mitchell, Inc. and its stockholders appeal the order dismissing their action against the Attorneys, the order that denied the stockholders' independent standing and the order denying the stockholders' motion for leave to amend. Jordan Mitchell, Inc. and the stockholders also appeal the orders dismissing their action against the Bermans at our Docket No. 92-1424. Finally, the Bermans have filed a cross-appeal from the district court's order denying their Rule 11 and Rule 26 motion for sanctions at our Docket No. 92-1456.
While all these appeals were pending, the Supreme Court held in Wyatt v. Cole, 118 L. Ed. 2d 504, 112 S. Ct. 1827 (1992), that private persons acting under color of law were not entitled to qualified immunity. Consequently, we must vacate the district court's orders dismissing the section 1983 claims against the Bermans and their Attorneys and remand the case for further proceedings.
Though the scope of review is somewhat different in each case and, on remand, development of the underlying facts concerning the open issues of waiver and good faith may vary as between the Landlord and the Attorneys, all three appeals present the same important legal issues: (1) whether a private person becomes a state actor when he causes a court's filing officer to enter a judgment by confession; (2) whether entry of a judgment by confession and execution on it makes the private persons who cause both state actors; (3) whether entry of a judgment by confession violates due process or instead no violation occurs until there is a seizure or detention of the debtor's property without pre-deprivation notice or hearing; (4) what standards govern waiver of a person's due process right to pre-deprivation notice and hearing; (5) whether a private party who acts under color of law to deprive a person of a constitutional right can assert in defense good faith reliance on a longstanding, widespread practice or procedure previously used without objection on constitutional grounds; and (6) if so, what are the standards by which good faith should be Judged.*fn2
Despite the potential distinctions that may arise in applying the waiver concept to the Bermans as opposed to their Attorneys, the difference in the procedural posture of each case and its effect on the scope of review, we think these common issues make it judicially efficient and convenient to consider all three appeals in this one opinion.
Before a detailed recitation of the events that led to these appeals or a full analysis of these legal issues a summary of the case is helpful. Thereafter, we will set out its facts in more detail and add a full description of Pennsylvania practice on judgment by confession. That will be followed by a procedural history, a short statement of the bases for federal jurisdiction over these cases and a Discussion of the scope of our appellate review. Thereafter, we will analyze the Fourteenth Amendment's requirement of state action and section 1983's restriction to persons who act under color of law. We will then discuss, in order, the constitutionality of Pennsylvania's procedure on confession of judgments both on entry and execution; waiver; the availability and limits of a private person's good faith defense, as opposed to the qualified immunity only a public official can assert; the stockholders' independent standing to seek damages for the acts of the Bermans and their Attorneys; and finally the district court's refusal of the stockholders' motion for leave to amend to assert their standing as real parties in interest, as successors to the right of their corporation, Jordan Mitchell, Inc., or as obligors on responsibilities they undertook in connection with its sale.
Fox Rothschild acted under a warrant to confess judgment in a printed form of lease for commercial office space between the Bermans and a corporation called Joseph J. Jordan, FAIA, P.C. That corporation was owned by one of the two stockholders of Jordan Mitchell, Inc. We assume Fox Rothschild acted on instructions from the Bermans. Before the judgment by confession was entered Jordan Mitchell, Inc. executed an amendment to the Lease ("Amendment") after consulting counsel about a dispute on its right to hold over under the Lease signed by its predecessor, Joseph J. Jordan, FAIA, P.C. The Amendment extended the Lease's term and incorporated its terms by reference, but the only document that contained the text of the warrant on which judgment was confessed was the original form Lease signed by Jordan Mitchell's predecessor, Joseph J. Jordan, FAIA, P.C. Following execution of the Amendment, a new dispute arose. It concerned the Bermans' claim that additional rent was due under a rent escalator clause in a rider to the original form Lease. In the course of this second dispute, the Bermans asked Fox Rothschild to confess judgment for rent in arrears.
When Fox Rothschild confessed judgment against Jordan Mitchell, Inc., they took action that caused the Sheriff of Philadelphia to execute on the judgment by garnishing Jordan Mitchell, Inc.'s bank account. The sheriff, following routine Pennsylvania practice, acted without prior notice or hearing for Jordan Mitchell, Inc. or any of its agents, employees or stockholders. We again assume the Attorneys acted under instructions from the Bermans when they set the garnishment process in motion.
On these facts we conclude that entry of the confessed judgment did not involve state action with consequences significant enough to make the Bermans and Fox Rothschild state actors, but we think their use of the sheriff to enforce the judgment make them persons acting under color of law. We then conclude, as did the district court, that entry of the judgment, when coupled with seizure of the corporation's bank account, without prior notice or opportunity to be heard, does violate the Due Process Clause of the Fourteenth Amendment to the Constitution.
After the district court dismissed the Tenant's actions on the basis of qualified immunity, the Supreme Court decided in Wyatt that qualified immunity is not available to private persons who become state actors for purposes of section 1983. Whether private persons who act under color of law may raise a defense of good faith was left open. Accordingly, the district court's orders dismissing Jordan Mitchell, Inc.'s claims must be vacated.
Because it relied on qualified immunity to support dismissal, the district court did not speak clearly as to whether Jordan Mitchell, Inc. had waived its constitutional right to due process. The waiver issue is likely to recur on remand. After considering the decision of the Supreme Court in D.H. Overmyer Co., Inc. v. Frick Co., 405 U.S. 174, 31 L. Ed. 2d 124, 92 S. Ct. 775 (1972) (debtor may waive the right to notice and hearing before a deprivation of property if the debtor freely and intelligently signs a document that authorizes judgment by confession), we believe that Jordan Mitchell, Inc.'s section 1983 claims against the Attorneys cannot be dismissed on a Rule 12(b)(6) motion because the complaint does not show on its face that the corporation waived its constitutional right to pre-deprivation hearing and notice. In the Bermans' case, again in consideration of Overmyer, we conclude that there remain genuinely disputed issues of material fact concerning waiver. We note that the district court on remand will have to consider whether the Bermans and their Attorneys can successfully assert a good faith defense and that issue is also likely to require the resolution of factual disputes. Finally, we note that the district court on remand may have to reconsider its orders dismissing the stockholders' claims for lack of standing.
On July 8, 1981, Jordan, acting on behalf of Joe J. Jordan, FAIA, P.C., a Pennsylvania corporation, executed a standard, preprinted "Form 60" lease for the fifth floor of an office building located at 1920 Chestnut Street in Philadelphia. Arnold Berman, trading as H.P. Realty ("H.P."), signed as landlord. The Lease was to commence September 1, 1981 and end August 1, 1986. Neither party was represented by counsel when it was signed.
On October 1, 1981, Mitchell and Jordan joined in the practice of architecture and formed Jordan Mitchell, Inc. It conducted its business out of the same Chestnut Street property Joe J. Jordan, FAIA, P.C. had leased from H.P.
By its terms, the Lease was to automatically renew for an additional one-year term on May 2, 1986 absent notice of non-renewal. The additional term would have commenced August 1, 1986, on expiration of the original term. On May 16, 1986 H.P. delivered a termination notice dated April 30, 1986 to Jordan Mitchell, Inc. Jordan Mitchell, Inc. retained counsel who advised H.P. that the Lease had already automatically renewed. Myron Berman then told Jordan he would "retaliate" if the leased premises were occupied after the end of the original term. Jordan Mitchell, Inc. refused to leave.
Thereafter, according to Jordan Mitchell, Inc., unnamed individuals acting on instructions from Myron Berman disconnected electrical wiring in Jordan Mitchell, Inc.'s offices on May 22, 1986 and obstructed the office entrance with garbage on May 23, 1986.
Despite these problems the parties were able to negotiate, through counsel, an Amendment extending the Lease's term. The Amendment formally substituted Jordan Mitchell, Inc. for Joe J. Jordan, FAIA, P.C. as tenant and extended the Lease's term for three years beginning August 1, 1986. In the Amendment the parties mutually released each other from all claims arising under the original Lease.
Paragraph 8 of the Amendment states: "Except as herein specifically set forth, the Lease remains in full force between the parties without default on the part of either of them." Appendix ("App.") at 143. Jordan Mitchell, Inc. executed the Amendment on October 29, 1986. H.P. did so on behalf of the Bermans on December 8, 1986.
The original form Lease between the Bermans and Joe J. Jordan, FAIA, P.C. was four pages long, printed front and back and signed at the end of the fourth page. The warrant of attorney to confess judgment, paragraph 11(e), was printed on the front of the third page of the printed form. It states:
If the rent, fixed and/or additional, shall remain unpaid on any day when the same ought to be paid, Lessee hereby empowers any attorney of the Court of Common Pleas of ______ County, Commonwealth of Pennsylvania, or any other Court there or elsewhere to appear as attorney for Lessee in any and all actions which may be brought for said arrears of rent, fixed and/or additional, and to sign for Lessee an agreement for entering in any competent Court, an amicable action or actions to confess judgment against Lessee for the recovery of all arrears of rent, fixed and/or additional, as aforesaid, and for interest and costs, together with an attorney's commission of 5%. Such authority shall not be exhausted by one exercise thereof, but may be exercised from time to time as often as any of said rent, fixed or additional, shall fall due or be in arrears; . . .
App. at 136. There is nothing in the record in Jordan Mitchell's case against the Bermans to show that paragraph 11(e) was specifically discussed either originally or during the negotiations over the Amendment, or that Joe J. Jordan, FAIA, P.C. had counsel when it signed the Lease form. Not surprisingly, there is likewise no reference to any such specific Discussions in the complaint against Fox Rothschild, and the Amendment does not set forth paragraph 11(e)'s text or expressly refer to any power to confess judgment.
The original Lease contained a Rider that is material to these cases.*fn3 The Rider granted H.P. the option of charging Joe J. Jordan, FAIA, P.C. additional rent in an amount equal to the lessee's proportionate share of any increases in taxes or operating expenses. The Rider required notice from the Landlord to the Tenant before the rent could be increased. Neither H.P nor the Bermans ever gave any notice of their intention to increase the rent during the original term of the Lease. The record does not show that the parties discussed the rent escalator during the negotiations which led to the Amendment.
The application of this rent escalator to the Amendment reignited the dispute between the Bermans and Jordan Mitchell, Inc. Paragraph 3 of the Amendment referenced an appended table setting forth the annual rent due. It states: "As rent for the lease premises during the extended term of the Lease, Lessee shall pay the annual amounts as set forth in the following Table . . . ." App. at 141-42. The Bermans contended that the rents in the table were minimum annual rentals which could be retroactively increased under Article 1 of the Rider to the original Lease.
After the parties executed the Amendment, H.P. and the Bermans tried to use the escalator clause found in the Rider to increase the rent, not just prospectively for rent that would become due in the extended term, but also retroactively for rent that had become due in the original term. H.P. sent Jordan Mitchell, Inc. a bill for $1,416.20 on February 10, 1988. H.P. said this represented Jordan Mitchell, Inc.'s proportional amount of local real estate tax increases for the years 1982 through 1988. Jordan Mitchell, Inc. paid this bill but now says it did so mistakenly. Jordan Mitchell, Inc. has since refused to pay the Bermans or H.P. any more of the rent H.P. claims is due under the escalator.
On October 13, 1988, H.P. sent Jordan Mitchell, Inc. a bill for increased operating expenses, also in apparent reliance on the rent escalator. When Jordan Mitchell, Inc. did not pay, Myron Berman asked Philadelphia Gas Works ("PGW") to cut off the gas to the leased premises. Jordan Mitchell, Inc. avoided termination of service by arranging for direct billing.*fn4
On March 7, 1989, H.P. offered to waive its October 13, 1988 claim for additional rent if Jordan Mitchell, Inc. would sign a new three-year lease. Jordan Mitchell, Inc. refused. The Bermans then directed Fox Rothschild to obtain and execute on a judgment for the rent claimed unpaid.
On May 16, 1989, Martha Chovanes, Esq. ("Chovanes"), a Fox Rothschild attorney, filed a complaint in confession of judgment against Jordan Mitchell, Inc. in the office of the Prothonotary of the Court of Common Pleas of Philadelphia in which the Bermans and H.P. were named as plaintiffs.*fn5 Simultaneously Chovanes filed a praecipe asking the Prothonotary to enter judgment and issue a writ of execution to the Sheriff. In their action in confession, the Bermans claimed $41,082.62 for rent in arrears plus related charges, less credit for a security deposit. Myron Berman, in his capacity as "managing agent" of H.P., executed the affidavit of default Pennsylvania law requires. Another Fox Rothschild attorney, Paul J. Brenman, Esq. ("Brenman"), entered his appearance for Jordan Mitchell, Inc., and confessed judgment on its behalf. The Prothonotary entered judgment against Jordan Mitchell, Inc. and issued the writ of execution. It directed the sheriff to serve on Fidelity Bank ("Fidelity") an order garnishing Jordan Mitchell, Inc.'s checking account. The sheriff did so. The order required Fidelity to freeze the funds in Jordan Mitchell, Inc.'s checking account to whatever extent necessary to insure payment of the judgment. As a result, Jordan Mitchell, Inc.'s account became overdrawn and six checks it had issued were returned unpaid.
Three days later, on May 19, 1989, Jordan Mitchell, Inc. received notice from Fidelity that its checking account had been garnished. With the notice Fidelity enclosed copies of the documents Fox Rothschild had filed in the court of common pleas. On May 24, 1989, Jordan Mitchell, Inc. filed a petition to open and/or strike the confessed judgment. The court of common pleas immediately issued a rule to show cause why the judgment should not be opened or stricken and vacated the attachment of Jordan Mitchell, Inc.'s checking account at Fidelity upon the deposit of $10,000.00 cash into an escrow account. Later, on June 5, 1989, the Bermans agreed to release the escrow. Finally, on July 21, 1989, the court of common pleas granted Jordan Mitchell, Inc.'s petition to open the judgment and returned the funds in the escrow account but denied its motion to strike.
On November 17, 1989, Jordan Mitchell, Inc. and its stockholders filed a six-count complaint against the Bermans and John J. Pettit, Jr., Prothonotary of the Court of Common Pleas of Philadelphia (the "Prothonotary"). Count I requested a declaratory judgment declaring that Pennsylvania's Rules of Civil Procedure permitting immediate attachment of all bank accounts and other assets of a defendant who has suffered a confessed judgment violate the Due Process Clause of the Fourteenth Amendment to the United States Constitution. Count II, based on 42 U.S.C.A. § 1983, sought damages from the Bermans for their attachment of Jordan Mitchell, Inc.'s bank account without due process of law. Counts III, IV and V alleged Pennsylvania common law claims of malicious use of process, fraud and malicious abuse of process. Count VI sought treble damages for violation of RICO.
On January 5, 1990, the Bermans filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) or, in the alternative, for summary judgment. On January 25, 1990, the Prothonotary likewise filed a motion to dismiss or, in the alternative, for summary judgment.
On February 22, 1991, the district court granted the Prothonotary's motion to dismiss on the ground that the claims against him were moot.*fn6 See Jordan v. Berman, 758 F. Supp. 269, 275-77 (E.D. Pa. 1991) ("Berman I "). The district court also held Pennsylvania's Rules of Civil Procedure authorizing the entry of judgment by confession are not unconstitutional; and, to the extent that Jordan Mitchell, Inc. and its stockholders relied on the state's procedure for entry of the judgment, they had "failed to state a cognizable claim" under section 1983. Id. at 278 (citing Swarb v. Lennox, 405 U.S. 191, 31 L. Ed. 2d 138, 92 S. Ct. 767 (1972)). The district court held, however, that Pennsylvania's post-judgment garnishment procedure did violate due process because it failed to provide for discretionary review and a prompt post-seizure hearing. 758 F. Supp. at 280.
The district court then decided there were outstanding issues of material fact that had to be resolved before the Bermans' Rule 12(b)(6) motion to dismiss*fn7 could be decided and so denied it at this point. The court noted, however, that private individuals could sometimes act under color of law if they invoked the power of the state to utilize an unconstitutional act. Id. at 278.
The district court also refused to dismiss the RICO claim of Jordan Mitchell, Inc. and its stockholders because "it cannot be determined beyond doubt at this time that, consistent with their allegations, [they] will be unable to prove that as a routine way of doing business, [the Bermans] attempted to coerce favorable lease extensions and payment of dubious charges from a number of tenants." Id. at 275. The court did dismiss the malicious use and abuse of process claims on their merits, but it dismissed the fraud claim without prejudice. Id. at 280-81.
On March 22, 1991, while discovery continued in the action against the Bermans, Jordan Mitchell, Inc. and its stockholders filed a separate action against Fox Rothschild. They alleged that Fox Rothschild, as attorneys for the Bermans, deprived Jordan Mitchell, Inc. and its stockholders of property without due process of law in violation of 42 U.S.C.A. § 1983 when they invoked the aid of state officials to enter a confessed judgment against Jordan Mitchell, Inc. and garnish its checking accounts.*fn8 On June 10, 1991, Fox Rothschild filed a Rule 12(b)(6) motion to dismiss this complaint. The motion asserted: (1) the stockholders did not have standing as individuals to assert a section 1983 claim; (2) Fox Rothschild's conduct was not actionable under section 1983 because there was no state action and Fox Rothschild did not act under color of law; and (3) Fox Rothschild was entitled to qualified immunity from liability.
On March 27, 1992, the district court granted Fox Rothschild's motion to dismiss. See Fox Rothschild I, 787 F. Supp. at 482. Holding preliminarily that the stockholders lacked standing because the bank account belonged to their corporation, Jordan Mitchell, Inc., and they had failed to establish any distinct individual injury, id. at 474-75, the court went on to conclude that the Attorneys' acts in invoking the state's post-judgment garnishment procedure involved state action for purposes of section 1983. Id. at 475-77 (citing Lugar v. Edmondson Oil Co., 457 U.S. 922, 73 L. Ed. 2d 482, 102 S. Ct. 2744 (1982)). Consistent with its holding in Berman I, the district court then held the Attorneys' use of Pennsylvania's standard post-judgment procedure to execute on the judgment they had obtained by confession violated due process. 787 F. Supp. at 477-78 (citing Berman I, 758 F. Supp. at 280)). Nevertheless, the district court granted the Attorneys' Rule 12(b)(6) motion to dismiss after concluding the Fox Rothschild attorneys, though private persons, were, like public officials acting under color of law, entitled to qualified immunity. 787 F. Supp. at 478-482. On qualified immunity, the court concluded the Attorneys reasonably believed their acts did not violate due process because of the unsettled and constantly evolving state of constitutional protection with regard to standard post-judgment procedures used to execute on confessed judgments. Id. at 482. The district court did not reach the waiver issue.
On May 4, 1992 the district court denied Jordan Mitchell, Inc.'s and its stockholders' motion for reconsideration of the order dismissing their action against Fox Rothschild. See Jordan v. Fox, Rothschild, O'Brien & Frankel, 792 F. Supp. 393 (E.D. Pa. 1992) ("Fox Rothschild II "). In an accompanying opinion it again held that Jordan Mitchell, Inc. had no section 1983 claim against the Attorneys for their acts in entering a judgment by confession. It explained that confession of judgment clauses are not invalid or ineffective as a matter of law because mere confession of judgment does not involve the kind of state action that subjects private actors to liability under section 1983. See id. at 395-97. Only upon service of the writ of execution did Jordan Mitchell, Inc. suffer a state-aided deprivation. Id.
In the meantime, the Bermans had filed a renewed motion for summary judgment on the reserved question of whether they were liable to Jordan Mitchell, Inc. and its stockholders under section 1983. They raised the same legal question Fox Rothschild had posed on its Rule 12(b)(6) motion; namely, whether Pennsylvania's standard post-judgment procedure for execution on a judgment obtained by confession violates due process. In addition, the Bermans also sought summary judgment on the RICO claims and the pendent state fraud claim and requested Rule 11 sanctions.
On May 4, 1992, the district court granted summary judgment to the Bermans on Jordan Mitchell, Inc.'s section 1983 claims because the Bermans, like their Attorneys, were entitled to qualified immunity. See Jordan v. Berman, 792 F. Supp. 380, 388-93 (E.D. Pa. 1992) ("Berman II "). The court dismissed the RICO claim holding Jordan Mitchell, Inc. had not shown the predicate acts needed to meet RICO's requirements of relatedness and continuity. Id. at 384-86. It again concluded that the stockholders had not shown the alleged predicate acts had caused it any injury. Id. at 385, 387-88. Finally, it refused to exercise supplemental jurisdiction over Jordan Mitchell, Inc.'s state law fraud claim after all the federal ...