Fletcher v. Rhode Island Hospital Trust National Bank

• Decision Date: 09 May 1974
• Docket Number: No. 73-1372.,73-1372.
• Citation: 496 F.2d 927
• Parties: Barbara FLETCHER et al., etc., Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

496 F.2d 927 (1974)

Barbara FLETCHER et al., etc., Plaintiffs, Appellants, v. RHODE ISLAND HOSPITAL TRUST NATIONAL BANK et al., Defendants, Appellees.

No. 73-1372.

United States Court of Appeals, First Circuit.

Argued March 5, 1974.

Decided May 9, 1974.

James L. O'Neill, Providence, R. I., with whom Bucci, O'Neill & Coia and Ralph J. Gonnella, Providence, R. I., were on brief, for appellants.

Edwin H. Hastings, Providence, R. I., with whom Tillinghast, Collins & Graham, Providence, R. I., was on brief, for Old Stone Trust Co., appellee.

Stephen A. Fanning, Jr., Providence, R. I., with whom Deming E. Sherman and Edwards & Angell, Providence, R. I., were on brief, for Rhode Island Hospital Trust National Bank and Bank-Americard Assn. of Rhode Island, Inc., appellees.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

LEVIN H. CAMPBELL, Circuit Judge.

Barbara Fletcher had a checking account at the Rhode Island Hospital Trust National Bank, and Marion Sass had such an account at the Old Stone Trust Co. Both have alleged in a complaint filed in the district court that, without request, the respective banks sent them each a BankAmericard; that each bank later claimed an indebtedness arising from use of the card; and that each bank, without notice to the cardholder or her approval, set off the amount in her checking account against the debt from use of the card.¹

Neither plaintiff alleges that she did not owe the card indebtedness to the bank at the time her deposit was set off in partial satisfaction. Rather each contends that the set off was unconstitutional because without notice and hearing, see Fuentes v. Shevin, 407 U.S. 67, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972) and, alternatively, that the failure to disclose the right to set off when issuing the credit card was in violation of the Consumer Credit Protection Act (the Act), 15 U.S.C. § 1637(a) (7). Damages, an injunction, and a declaration are sought. Upon defendants' motion, the district court dismissed for failure to state a claim, F.R.Civ.P. 12(b)(6), and plaintiffs appealed.²

I

Count 1, the constitutional claim, belongs to a growing number of post-Fuentes attacks on private collection procedures. Brought under 42 U.S.C. § 1983, it alleges that "the right of banker's set off against deposit funds as recognized and enforced in the common law and not prohibited in the statutory law" violates the Fourteenth Amendment by authorizing seizure of deposited funds without prior notice and opportunity to be heard. The district court held, however, that the banks' actions were not "under color of" state law within the meaning of § 1983.³ Citing "overwhelming authority at the present time" that repossession of goods under a conditional sales contract, pursuant to Section 9-503 of the Uniform Commercial Code, is not state action, it said,

"the exercise by the defendant banks of their common-law right of set off is . . . even farther sic removed from any state involvement. . . . Here we do not even have . . . the enactment of a statute. These actions by the defendants were purely private actions in furtherance of their private interest."

It is not disputed that a claim under § 1983 requires "state action". Civil Rights Cases, 109 U.S. 3, 3 S.Ct. 18, 27 L.Ed. 835 (1883). A defendant, as the statute provides, must have acted "under color of" state law; and for a plaintiff to be deprived of a right secured by the Fourteenth Amendment, the state itself, not a mere private party, must have taken property without due process of law.⁴

Plaintiffs would have us find state action from (1) the sanctioning in Rhode Island of the practice of bank set off, and (2) the state's own involvement with the banking industry. We shall discuss the two theories separately. As did the district court, and as have most other federal courts, including the second, eighth and ninth circuits, in analogous self-help cases, we conclude that the challenged action was private, not state, and so we affirm the dismissal of Count 1. See Bichel Optical Laboratories, Inc. v. Marquette Nat'l Bank, 487 F.2d 906 (8th Cir. 1973); Jojola v. Wells Fargo Bank, No. C-71 900 SAW (N.D.Cal. May 8, 1973); cf. Bond v. Dentzer, 494 F.2d 302 (2d Cir. 1974); Adams v. Southern Cal. First Nat'l Bank, 492 F.2d 324 (9th Cir. 1973); Shirley v. State Nat'l Bank, 493 F.2d 739 (2d Cir. 1974).⁵

State Sanction of Set Off

In Westerly Community Credit Union v. Industrial Nat'l Bank, 103 R.I. 662, 667-668, 240 A.2d 586, 589-590 (1969), the Supreme Court of Rhode Island stated,

"As a general rule a bank may look to deposits in its possession for repayment of any material indebtedness owed to it on the part of a depositor. citation omitted Such a right grows out of the contractual relationship existing between the depositor and the bank which arises at the time the depositor delivers and commits money to the bank\'s custody. . . . The right of a bank to apply deposits to extinguish a debt owed to it by a depositor is referable to principles of equity and in some states receives additional support from statutory law; . . ."

Plaintiffs argue that recognition of set off changed the common law so as to allow a bank to deprive citizens of property without resort to courts.⁶ But we disagree that Westerly reflects a break with tradition. Plaintiffs rely upon cases dealing with set off as a pleading device, a different matter. As used here to describe a banker's right growing from his contract to offset mutual debts, the term refers to a familiar self-help practice (once called a "right of stoppage") that has been accepted for years in this country. See Studley v. Boylston Bank, 229 U.S. 523, 527-528, 33 S.Ct. 806, 57 L.Ed. 1313 (1913). A Rhode Island case decided half a century before Westerly makes reference to the practice, Hungerford v. Curtis, 43 R.I. 124, 110 A. 650 (1920), which is in no way unique to Rhode Island. See 10 Am.Jur. 2d Banks § 666 (1963); 9 C.J.S. Banks and Banking § 295 (1938). See generally United States v. Butterworth-Judson Corp., 267 U.S. 387, 394-395, 45 S.Ct. 338, 69 L.Ed. 672 (1925); New York County Nat'l Bank v. Massey, 192 U.S. 138, 24 S.Ct. 199, 48 L.Ed. 380 (1904).

That a creditor should refuse to pay out money for one who already owes him a debt is not surprising. Had the banks not been able to do so without signalling their intentions, the funds might have gone swiftly, and there would have been no other assets to satisfy the banks' claims. In any event, whatever the truth of the old saw that possession is nine-tenths of the law, a creditor who holds something of value to his debtor is differently situated from one who does not: he does not need the state to facilitate his collection efforts.

The cases upon which plaintiffs must rely contain the further ingredient of the state's having helped in the seizure of the debtor's property. In Fuentes the state court issued writs of replevin and these were executed by state officials. The creditor could obtain the property peacefully only by the affirmative intervention of the state. In footnote 12, the Fuentes court recognized the difference between a state's lending process to a creditor and a creditor's proceeding "without the use of the state power, through self-help, by `distraining' the property before a judgment." Id. at 79. Similarly in Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349 (1969), a garnishment writ was issued by a state court clerk.⁷

Yet notwithstanding Rhode Island's lack of instrumental assistance, plaintiffs maintain that the state creates, enforces, or encourages "the impetus" for the private actions, and thus "acts" even though it may not be involved with the banks or the challenged action. See, e. g., Adickes v. S. H. Kress & Co., 398 U. S. 144, 170, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); cf. Shelley v. Kraemer, 334 U.S. 1, 68 S.Ct. 836, 92 L.Ed. 1161 (1948). We do not believe, however, that Rhode Island's mere passive acceptance of a bank's ability to help itself is encouragement enough to constitute state action. There are myriad more or less conventional private property rules which a state may define, codify or — as here — simply acknowledge. In the ordinary case such state judicial or legislative activity in the economic sphere is not, by itself, state action. Rhode Island has done no more than announce acceptance of a familiar private practice. She has not created or encouraged it. Her courts have not even addressed themselves to the procedural aspects of set off.

In Moose Lodge No. 101 v. Irvis, 407 U.S. 163, 92 S.Ct. 1965, 32 L.Ed.2d 627 (1972), a state's granting of liquor licenses to clubs practicing private discrimination was held not to be such encouragement of the practice as to involve the state significantly. "Where the impetus for the discrimination is private the State must have `significantly involved itself . . .' to fall within the ambit of the constitutional prohibition." Id. at 173. The impetus for bank set off is private, and we fail to see how the state's passive acquiescence amounts to involvement beyond that present in Moose Lodge. See also Evans v. Abney, 396 U.S. 435, 90 S.Ct. 628, 24 L.Ed.2d 634 (1970).

Reitman v. Mulkey, 387 U.S. 369, 87 S.Ct. 1627, 18 L.Ed.2d 830 (1967), lends the greatest theoretical support to the argument that a state's common law doctrine may amount to state action. The Court held unconstitutional an amendment to California's constitution providing that the state could not limit a person's right to sell or rent his real property to whomever he chooses. The amendment was aimed at state laws curbing racial discrimination in housing. The Court held that the amendment not only altered the law but significantly involved the state in racial discrimination. In the instant case, however, Rhode Island has not acted affirmatively to terminate protections once afforded to bank depositors. Its legislature remains unfettered to regulate or...