Jordan v. Fox, Rothschild, O'Brien & Frankel

Citation20 F.3d 1250
Decision Date18 April 1994
Docket NumberA,No. 92-1456,92-1424 and 92-1456,Nos. 92-1435,No. 92-1424,92-1424,92-1456,s. 92-1435
PartiesJoe J. JORDAN; James E. Mitchell; Jordan Mitchell, Inc., Appellants, v. FOX, ROTHSCHILD, O'BRIEN & FRANKEL, Appellee. Joe J. JORDAN; James E. Mitchell; Jordan Mitchell, Inc., on their own behalf and on behalf of all others similarly situated v. Arnold T. BERMAN; Myron J. Berman; John J. Petit, Jr., Prothonotary of the Court of Common Pleas of Philadelphia County, Joe J. Jordan; James E. Mitchell; Jordan Mitchell, Inc., Appellants atrnold T. Berman and Myron J. Berman, Appellants at
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Sharon K. Wallis, (argued), Philadelphia, PA, for Joe J. Jordan, James E. Mitchell and Jordan Mitchell, Inc.

Steven R. Waxman, (argued), Leslie M. Gerstein, Barry G. Obod, Fox, Rothschild, O'Brien & Frankel, Philadelphia, PA, for Fox, Rothschild, O'Brien & Frankel.

Jacob C. Cohn and Jerome J. Shestack, (argued), Wolf, Block, Schorr & Solis-Cohen, Philadelphia, PA, for Arnold T. Berman and Myron J. Berman.

Before HUTCHINSON and SCIRICA, Circuit Judges, and STANDISH, District Judge. *


HUTCHINSON, Circuit Judge.

I. Introduction

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. Sec. 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. Secs. 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. 1

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, --- U.S. ----, 112 S.Ct. 1827, 118 L.Ed.2d 504 (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. 2

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.

II. Initial Summary

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 ...

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