Callen v. Sherman's, Inc.

The opinion of the Court was delivered by

This appeal questions the validity of statutes permitting a landlord to distrain the goods of a commercial tenant for unpaid rent. N.J.S.A. 2A:33-1 to -23. Specifically, the appeal presents two issues. The first issue is whether distraint by a municipal constable at the request of a landlord invokes the protection of due process accorded by the fourteenth amendment of the United States Constitution. Implicit in that issue is the further question of whether the acts of the constable are fairly attributable to the state and, therefore, constitute “state action.” The second major issue is, if there is state action, whether the statute provides a commercial tenant with sufficient notice and opportunity to be heard to satisfy the constitutional requirement of due process.

The landlord filed a complaint seeking damages for breach of the lease, and the tenant counterclaimed asserting that the *118 distraint was unconstitutional. Before trial, the court found that the tenant had breached the lease and it granted a partial summary judgment on liability for the landlord. At the commencement of the trial, the issues were the damages due the landlord, the liability of the landlord because of the distraint, and damages, if any, due the tenant. The court impaneled a jury and granted the landlord’s motion to dismiss the counterclaim as a matter of law. In reaching that conclusion, the trial court reasoned that the actions of the landlord and constable were not state action and, therefore, that the tenant was not entitled to due process under the fourteenth amendment. With the consent of counsel, the court dismissed the jury and proceeded as the trier of fact to determine the damages due the landlord. At the conclusion of the trial, the court entered a judgment against the tenant for unpaid rent in the amount of $7,418.07.

On appeal, the Appellate Division affirmed the damages award for the landlord, but reversed the dismissal of the tenant’s counterclaim and remanded the matter for a new trial on the counterclaim. The court found that the distress constituted state action and that the tenants were not afforded due process.

We granted the landlord’s petition for certification to review the Appellate Division’s determination of the unconstitutionality of the statutes granting a landlord the right to distrain a commercial tenant’s goods for unpaid rent. 89 N.J. 443 (1982). Although we conclude that the statutes are unconstitutional as applied in this case, we find further, in light of all the facts, that the tenant suffered no damages because of the distraint. Consequently, we reverse the judgment of the Appellate Division, thereby reinstating the judgment of the trial court dismissing the counterclaim.

I

Plaintiffs are four individuals trading as Pard Realty, a partnership that owns a commercial building in Little Silver, *119 New Jersey. Pard Realty leased a store in the building to Sherman’s, Inc. for an interior decorating retail business. Defendants Florence Karasik and her husband, Jules, principals of Sherman’s, guaranteed the lease.

The lease term extended from November 15, 1975 to November 14, 1977, and the total rent was $19,200, payable $800 per month, due in advance on the fifteenth of each month. In the event of a default, the tenant continued to be liable for the monthly rent, but the lease did not provide for the acceleration of the remaining payments. The tenant failed to pay the rent due on October 15,1976, and in late October or early November advertised with signs at the premises that it was “going out of business.” Mr. Callen, on behalf of the landlord, spoke with Mr. Karasik, who said that he could not pay the arrearage and confirmed that he was, in fact, going out of business. On November 12, 1976 the landlord filed its complaint seeking the entire balance due under the lease, $10,400; in fact, however, the actual rent due by November 15 was only $1,600.

After consulting a lawyer, the landlord engaged a municipal constable who distrained the goods in the store by padlocking the premises on December 3, 1976, three weeks after the filing of the complaint. Although the tenant took no action to dissolve the distraint, it notified the United States Small Business Administration (SBA), which held a prior security interest in the personal property and fixtures of the store. The SBA informed the landlord and the constable of its security interest and of the. $123,000 balance due on its loan. Pursuant to the SBA’s request, the constable turned over the keys to the premises to a representative of a private auctioneer who, on December 13, conducted a public sale of the tenant’s property on behalf of the SBA.

On December 15,1976, the SBA surrendered possession of the premises to the landlord and paid $133 as rent for the period during which it controlled the store. Nothing indicates that the landlord had any knowledge of the SBA’s lien on the property at *120 the time of the distraint, and neither the SBA nor the constable is a party to the present action. Shortly after regaining possession of the premises, the landlord advertised for a new tenant, but did not lease the premises until September 30, 1977.

Furthermore, counsel have acknowledged that the certificate of incorporation of Sherman’s, Inc. was revoked in 1981 for nonpayment of corporate business taxes. Furthermore, in 1980 Mr. and Mrs. Karasik filed a petition in bankruptcy that included the judgment in favor of the landlord as a liability and the equity, “if any,” in the counterclaim as an exempt asset. The trustee in bankruptcy abandoned any interest in that claim, and in 1981 the Karasiks received a discharge in bankruptcy, which declared null and void all judgments.

II

Distraint of a tenant’s goods by a landlord may be the sole surviving relic of the early common law’s tolerance of self-help. See Commercial Credit v. Vineis, 98 N.J.L. 376 (Sup.Ct.1923). Nonetheless, since at least the thirteenth century, the common law has condoned distraint as an exception to the principle that “self-help is an enemy of the law, a contempt of the king and his court.” 2 Pollock & Maitland, Hist, of Eng. Law 574 (Cambridge ed.1968). Other forms of self-help, such as replevin, generally have yielded to the contemporary belief that society is better off if adversaries who cannot otherwise settle their differences proceed before an impartial third party such as a mediator, arbitrator or judge.

At common law a landlord was allowed only to hold property pending the payment of rents or services. Impounded goods— e.g., livestock — were considered to be in the custody of the law. A tenant could not breach the pound and remove the goods, see 3 W. Blackstone Commentaries *12-13, and the landlord could not sell the goods in satisfaction of the debt. Elkman v. Rovner, 133 N.J.Eq. 93, 98 (1943). See 1 Pollock & Maitland, supra, at 353. Later, statutes permitted the landlord to appraise and sell *121 the goods under official supervision after notice to the tenant. In response to a perceived excess of power in the hands of feudal lords, other statutes were enacted to limit the ability of a lord to distrain. The Statute of Marlebridge, for example, banned unreasonable distraints, gave the tenant the right of replevin and ended distraint for services not due. Bradby, A Treatise on the Law of Distresses 8 (1808).

In New Jersey, statutes have provided for distraint since 1795, and the current act, N.J.S.A. 2A:33-1 to -23, still exhibits its feudal origins. Although neither the statutes nor the common law has ever specified the form that distraint should take, Bradby, supra, at 216-17, padlocking of the tenant’s premises has long existed as an accepted method of distraint. See, e.g., Elkman v. Rovner, supra; Lipinski v. Frank, 12 N.J.Misc. 174 (1934). No notice or hearing is required before distraint, but a distraining party is liable in damages for an “unreasonable, excessive or wrongful distraint....” N.J.S.A. 2A:33-1. Thus, in Lipinski v. Frank, supra, a distraint was adjudged to be wrongful when the landlord sold for $50 goods worth $450, although the tenant owed only $45 and offered to pay the amount due.

The New Jersey statute further provides for double damages for goods wrongfully distrained and sold, N.J.S.A. 2A:33-17, but awards the landlord double costs if the tenant loses in an action for wrongful distraint. N.J.S.A. 2A:33-19. The act exempts from distraint residential premises, N.J.S.A. 2A:33-1, and other kinds of property. N.J.S.A. 2A:33-6. Unlike the early English common law, the New Jersey statute encourages the participation of a government official from begnning to end: “All sheriffs and constables shall aid in the execution of the provisions of this chapter.” N.J.S.A. 2A:33-14.

Following the distraint, the goods are impounded and the tenant is liable for treble damages for wrongfully removing them. N.J.S.A. 2A:33-16. The statute expressly provides for the assistance to the landlord of a constable or peace officer *122 where the tenant has removed or concealed property subject to distraint. N.J.S.A. 2A:33-22.

Once the landlord has effected a distraint on the premises and impounded sufficient goods, the tenant has ten days after receiving notice to commence an action to recover them. Thereafter, on two days’ notice, the landlord may have the goods inventoried and appraised by three persons sworn by the county sheriff or local constable. N.J.S.A. 2A:33-9. Subsequently, on five days’ public notice, the landlord can hold a public sale, N.J.S.A. 2A:33-10, the proceeds of which apply toward the satisfaction of rent due and the costs of the distraint and sale. Any surplus money is left with the sheriff or constable for the property owner. The tenant may sue for replevin of distrained goods before sale or later for wrongful distraint and sale. N.J.S.A. 2A:33-17. In the absence of such an action, however, the entire procedure may go forward without the involvement of a judge or other impartial third party. The abiding question is whether the statutory distraint procedure comports with fundamental notions of due process under the United States Constitution.

Ill

To be subject to scrutiny under the due process clause, state action must result in the deprivation of life, liberty or property. Paul v. Davis, 424 U.S. 693, 710-11, 96 S.Ct. 1155, 1164-65, 47 L.Ed.2d 405 (1976); Montville Tp. v. Block 69, Lot 10, 74 N.J. 1, 8 (1977). Before determining whether the process afforded by the Distress Act meets constitutional standards, the initial question is whether sufficient state action inheres in the distraint by the constable to imperil the constitutional rights of the tenant.

The existence of state action depends “on the relationship between the state and the challenged conduct.” State v. Drout-man, 143 N.J.Super. 322, 329-30 (Law Div.1976). An evolving *123 concept, state action is susceptible only to a fluid definition. See State v. Schmid, 84 N.J. 535, 552 (discussing state action in the context of first amendment principles as applied to owners of private property). The most recent decision of the United States Supreme Court supports the conclusion that the distraint by the constable resulted in a deprivation by the state. Lugar v. Edmondson Oil Co.,-U.S.-, 102 S.Ct. 2744, 73 L.Ed.2d 482 (1982).

Lugar involved a Virginia statute allowing creditors to petition the clerk of the court ex parte for a writ of attachment against the goods of a debtor. Pursuant to the statutory scheme, the county sheriff executes the writ and a hearing may occur later on the propriety of the attachment. In Lugar, after this post-deprivation hearing, the court dismissed the attachment. The debtor then sued the creditor under 42 U.S.C. § 1983 claiming a violation of his constitutional rights. The Court found that the creditor’s remedies implicated state action: “Beginning with Sniadach v. Family Finance Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349 (1969), the Court has consistently held that constitutional requirements of due process apply to garnishment and prejudgment attachment procedures whenever officers or the state act jointly with a creditor in securing the property in dispute.” 102 S.Ct. at 2752.

The Court enunciated a two-pronged test for determining whether an action depriving an individual of a constitutional right is “fairly attributable” to the state:

First, the deprivation must be caused by the exercise of some right or privilege created by the state or by a rule of conduct imposed by the state or by a person for whom the state is responsible. In Sniadach, Fuentes, W.T. Grant and North Georgia, for example, a state statute provided the right to garnish or to obtain prejudgment attachment, as well as the procedure by which the rights could be exercised. Second, the party charged with the deprivation must be a person who may fairly be said to be a state actor. This may be because he is a state official, *124 because he has acted together with or has obtained significant aid from state officials, or because his conduct is otherwise chargeable to the state.

[Id. at 2754.] 1

In the distraint in the present case, the landlord and constable acted pursuant to a right created by statute. Although the right to distrain existed at common law, the landlord relied on its rights under the statute in effectuating the distraint. This governmental involvement is mandated by the requirement that sheriffs and constables, if requested, aid in the execution of a distraint. N.J.S.A. 2A:33-14. Under the first part of the Lugar test, then, the deprivation was caused by a right created or rule imposed by the state.

Next we must determine whether the landlord, in effectuating the distraint, acted in cooperation with a state official. Lugar, supra, 102 S.Ct. at 2754. That determination is necessary because the Court has declined to find state action from the mere existence of a body of property law without the involvement of a state official in enforcing that law. Flagg Bros., Inc. v. Brooks, 436 U.S. 149, 98 S.Ct. 1729, 56 L.Ed.2d 185 (1978). While some scholars believe that regulatory policy can constitute government action, Tribe, American Constitutional Law, § 18-7 (1978), Flagg Bros, and Lugar require the identification of a state actor. In this case, the constable, who padlocked the store and delivered the keys to the SBA, played that part. 2 By *125 carrying out his official duties pursuant to a statutory scheme, the constable was a state actor. We conclude that the conduct of the lessor and constable constitutes state action.

That finding, mandated by Lugar, is consistent with King v. South Jersey Nat’l Bank, 66 N.J. 161 (1974). In King, we held that no state action was involved m the repossession of an automobile by a creditor without the aid of state officials, pursuant to an agreement between the parties and a provision of the Uniform Commercial Code. N.J.S.A. 12A:9-503. As this Court noted in King, the Code does not provide expressly for any action by a governmental official in the act of repossession. We found the UCC to be a mere codification of preexisting private rights and “is in effect a passive perpetuation of the common law and as such does not ‘significantly’ involve the state in the denial of due process rights.” Id. at 172. Moreover, the statute “permits a creditor to exercise self-help in retaking property in which he possesses a valid security interest. The statute in no way commands the creditor so to do — it simply authorizes. And mere authorization of private conduct does not ex necessitate comprise ‘state action.’ ” Id. at 180 (Clifford, J., concurring).

The Distress Act does far more than simply permit private action. It authorizes governmental assistance throughout the procedure, N.J.S.A. 2A:33-14, and requires governmental assistance in certain circumstances. 3 In the present case, the landlord *126 enlisted the aid of the constable from the inception; it was the constable who effectuated the distraint by padlocking the premises. Those facts and the statutory scheme distinguish the present case from the repossession of an automobile by a private party pursuant to the UCC in King. See Van Ness Indus., Inc. v. Claremont Painting & Decorating Co., 129 N.J.Super. 507, 514 (Ch.Div.1974) (also holding that the distress statute involves state action, distinguishing it from provisions of the UCC).

For similar reasons, Flagg Bros., Inc., supra, also is distinguishable. Flagg Bros, addressed the constitutionality of the provisions of the UCC pertaining to warehousemen’s liens. The Court rejected the claim that state action was involved, reasoning: “[t]his Court ... has never held that a State’s mere acquiescence in a private action converts that action into that of the State.” Id. 436 U.S. at 164, 98 S.Ct. at 1737.

Furthermore, the New Jersey Distress Act differs significantly from the Pennsylvania statute that the United States Court of Appeals for the Third Circuit, in a decision rendered one month before Lugar, found not to give rise to state action. In Luria Bros. & Co., Inc. v. Allen, 672 F.2d 347 (3d Cir.1982), a private individual distrained pursuant to a statute that did not provide for any participation of state officials. The court wrote: “Such distress may be made by the landlord or by his agent duly authorized thereto in writing.” Pa.Stat.Ann. tit. 68, § 250.302. See also Hitchcock v. Allison, 572 P.2d 982 (Okl.1977) (finding no state action where landlords executed statutory lien on tenant’s property without the aid of any state officials).

Not all state action results in a deprivation of life, liberty or property. At times, it is a difficult and subtle task to *127 determine whether there has been a deprivation sufficient to trigger the procedural protection of the Constitution. See Meachum v. Fano, 427 U.S. 215, 96 S.Ct. 2532, 49 L.Ed.2d 451 (1976); Bishop v. Wood, 426 U.S. 341, 96 S.Ct. 2074, 48 L.Ed.2d 684 (1976); Paul v. Davis, supra; Wolff v. McDonnell, 418 U.S. 539, 94 S.Ct. 2963, 41 L.Ed.2d 935 (1974); Nicoletta v. North Jersey Dist. Water Supply Comm'n, 77 N.J. 145 (1978); 2 Davis, Administrative Law Treatise, chap. 11 (1979 and Supp.1982). Compare Bd. of Regents v. Roth, 408 U.S. 564, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972), with Perry v. Sindermann, 408 U.S. 593, 92 S.Ct. 2694, 33 L.Ed.2d 570 (1972). Nonetheless, even a temporary deprivation of property can be a “deprivation” under the fourteenth amendment. Goss v. Lopez, 419 U.S. 565, 576-77, 95 S.Ct. 729, 737-38, 42 L.Ed.2d 725 (1975); Fuentes v. Shevin, 407 U.S. 67, 85, 92 S.Ct. 1983, 1996, 32 L.Ed.2d 556 (1972). The padlocking of one’s business premises by a municipal constable, although temporary, qualifies as a deprivation of property under this statement. Not only did the distraint preclude the tenant’s control of the goods within the store, but it further denied the tenant access to the property in which it held a leasehold estate. Hudson Transit Corp. v. Antonucci, 137 N.J.L. 704 (1948). We conclude that the tenant was deprived of property within the meaning of the fourteenth amendment.

IV

Having concluded that the distraint by the constable pursuant to the statute invokes the defendant’s constitutional rights, we must decide what process is due to the tenant. Both this Court and the Supreme Court of the United States have recognized that due process is a flexible concept, not susceptible to a single definition suitable for all situations. Goss v. Lopez, 419 U.S. at 579, 95 S.Ct. at 738; Nicoletta v. North Jersey Dist. Water Supply Comm’n, 77 N.J. at 164. Although that flexibility permits an appropriate accommodation of competing interests, it also injects an element of uncertainty into the determination of whether procedures meet constitutional standards. R. Scott, *128 “Constitutional Regulation of Provisional Credit or Remedies: The Cost of Procedural Due Process,” 61 Va.L.Rev. 807, 809 (1975). This uncertainty is reflected in the decisions of the United States Supreme Court over the past thirteen years in considering prejudgment statutory remedies of creditors.

The beginning point for analysis is Sniadach v. Family Fin. Corp., 395 U.S. 337, 89 S.Ct. 1820, 23 L.Ed.2d 349 (1969), in which the Court struck down a Wisconsin statute allowing creditors to garnish the wages of debtors through a summons issued by the clerk of the court. The statute required the creditor to notify the debtor of the garnishment within ten days and provided the wage earner with the right to a subsequent judicial hearing. The Court acknowledged that those procedures might meet constitutional standards in extraordinary situations, but on considering that wages are “a specialized type of property presenting distinct problems in our economic system,” concluded that a predeprivation hearing must be accorded to a wage earner. Obviously impressed by the hardship lost wages can impose on working people, the Court determined that, absent notice and hearing, prejudgment garnishment violates fundamental principles of due process. Id. at 341-42, 89 S.Ct. at 1822-23.

Three years later, the Court, in a 4-3 decision, expanded the process that was due debtors in Fuentes v. Shevin, supra, striking down Florida and Pennsylvania replevin statutes that allowed for the summary seizure of goods by a state agent upon the ex parte application of a creditor and the posting of a security bond in double the value of the property seized. Both statutes allowed the debtor to reclaim possession by posting his own bond within three days of the seizure. Under the Florida statute, the creditor needed to assert only that the debtor was wrongfully detaining the goods and that the creditor was legally entitled to them. The creditor was not required to prove ownership of the goods, but was obliged to prosecute the action against the debtor immediately. Although similar to the Florida scheme, the Pennsylvania statute authorized replevin without requiring the creditor to initiate a prompt court action. Rather, *129 the debtor was permitted to file a demand that the creditor commence an action within twenty days. Thus, under both statutes, debtors were protected in two ways: first, the statute provided some opportunity for a post-deprivation hearing; second, the creditor was required to post a bond in double the value of the property being replevied. However, the Court found these combined protections to be inadequate.

In holding that a predeprivation hearing was required, Justice Stewart, joined by Justices Douglas, Brennan and Marshall, reasoned:

If the right to notice and a hearing is to serve its full purpose, then, it is clear that it must be granted at a time when the deprivation can still be prevented. At a later hearing, an individual’s possessions can be returned to him if they were unfairly or mistakenly taken in the first place. Damages may even be awarded to him for the wrongful deprivation. But no later healing and no damage award can undo the fact that the arbitrary taking that was subject to the right of procedural due process has already occurred. ‘This Court has not ... embraced the general proposition that a wrong may be done if it can be undone.’ (citations omitted).

[Fuentes v. Shevin, 407 U.S. at 81-82, 92 S.Ct. at 1994-95.] The Court held further that the posting of a bond was not an adequate substitute for a prior hearing. Id. at 83, 92 S.Ct. at 1995.

Dissenting on behalf of himself, Chief Justice Burger and Justice Blackmum, Justice White concluded that

much depends on one’s perceptions of the practical considerations involved .... I cannot say that the likelihood of a mistaken claim of default is sufficiently real or recurring to justify a broad constitutional requirement that a creditor do more than the typical state law requires and permits him to do.

[Id. at 100, 92 S.Ct. at 2004 (White, J., dissenting).]

Two years after its decision in Fuentes, the Court upheld a Louisiana statute allowing for prejudgment sequestration upon the buyer’s default in paying the balance of the purchase price for household goods. Mitchell v. W.T. Grant Co., 416 U.S. 600, 94 S.Ct. 1895, 40 L.Ed.2d 406 (1974). As with the Florida statute struck down in Fuentes, the creditor was required to post a bond and to pursue the matter in court following the sequestration. The statute did not require the creditor to notify the debtor *130 before seizing the goods, but granted the debtor the right to an immediate post-deprivation hearing seeking dissolution of the writ. Furthermore, the debtor could regain possession of the goods by posting his own bond. Of special importance to the Court was the requirement that, before a writ of sequestration could issue, the creditor file a verified complaint with a judge. The accompanying affidavit must recite specific facts setting forth the nature of the claim, the amount due, and the reason the creditor believed the debtor would dispose of the goods during the pendency of the proceedings.

In the majority opinion, Justice White observed that both the debtor and the creditor had an interest in the goods and that, where only property rights are involved, a post-deprivation hearing can satisfy due process. Justice White undertook to distinguish Fuentes, but in a concurring opinion Justice Powell stated that the effect of the majority opinion was to overrule Fuentes. Justice Brennan dissented, asserting that the statute was unconstitutional under Fuentes. Justice Stewart, joined by Justices Douglas and Marshall, regarded the statute as unconstitutional because it did not provide for notice and hearing. Their dissent stated that the majority had simply rejected the reasoning of the Fuentes majority and adopted instead the analysis of the Fuentes dissent. Thus, it appeared that, after a life-span of two years, Fuentes had expired.

This doubt about the viability of Fuentes remained only until the following year, when the Court, again speaking through Justice White, invalidated a Georgia garnishment statute in North Georgia Finishing, Inc. v. Di-Chem, 419 U.S. 601, 95 S.Ct. 719, 42 L.Ed.2d 751 (1975). In a concurring opinion, Justice Stewart was gratified to note that his report of the demise of Fuentes in his concurring opinion in Mitchell “seems to have been greatly exaggerated.” 419 U.S. at 608, 95 S.Ct. at 723.

Like the Louisiana statute found sufficient in Mitchell, the deficient Georgia statute in North Georgia Finishing required *131 the creditor to post a bond and file an affidavit to obtain a garnishment. In addition, both statutes permitted the debtor to regain his property by posting his own bond. However, the statutes differed in several respects. First, the Georgia statute did not provide the debtor with the right to an early hearing. Furthermore, the writ could be “issued by a court clerk without notice or opportunity for an early hearing and without participation by a judicial officer.” 419 U.S. at 606, 95 S.Ct. at 722. Under the Georgia statute, moreover, the affidavit “need contain only conclusory allegations,” and the affiant need not have personal knowledge of the facts. Id. at 607, 95 S.Ct. at 722. In a concurring opinion, Justice Powell noted with dissatisfaction the resuscitation of Fuentes and said that due process would be satisfied if state law required the posting of an adequate bond, establishment before a neutral officer (not necessarily a judge) of the factual basis for the remedy, and a prompt post-garnishment hearing. Justice Blackmun, joined by Chief Justice Burger, in part, and Justice Rehnquist, dissented, arguing in part that the Georgia system afforded commercial entities all the protection required by due process.

The shifting sands of the Supreme Court decisions demonstrate an inconsistency that has been noted by its members and criticized by scholars. 4 Furthermore, each of the majority opinions has inspired a variety of separate opinions, thereby creating *132 an individualized and fragmented body of law. 5 With respect to creditors’ preliminary remedies, the Court has been described as being in “serious disarray.” Friendly, “Some Kind of Hearing,” 123 Univ. of Pa.L.Rev., 1263, 1316 n. 244 (1975). See discussion in Parks v. “Mr. Ford”, 556 F.2d 132, 148-50 (3d Cir.1977) (Gibbons, J., concurring). That result is regrettable because it introduces uncertainty in commercial transactions involving not only commercial entities, as in the present case, but also consumers. See