Troy Ltd. v. Renna

These are appeals, pursuant to 28 U.S.C. Sec. 1292(b) (1976), from an order granting partial summary judgment, 580 F.Supp. 69, declaring that section 14 of the New Jersey Senior Citizens and Disabled Protected Tenancy Act, 1981 N.J.Laws ch. 226, Sec. 14 (codified at N.J.Stat.Ann. Sec. 2A:18-61.11(d) (West Supp.1983)) (hereafter the "Tenancy Act"), violates the impairment of contracts and taking clauses of the United States Constitution. The plaintiffs are owners of interests in an apartment complex in Springfield, New Jersey affected by that Act. The defendants are the Commissioner of the New Jersey Department of Community Affairs, the Attorney General of New Jersey, and three tenants in the apartment complex who may be protected by the Tenancy Act.

We hold that the Tenancy Act does not violate the impairment of contracts or taking clause of the United States Constitution. Accordingly, we reverse.

New Jersey regulates its rental housing stock through a comprehensive set of statutes. This discussion begins with an examination of the rental housing legislation in place before 1981 and then moves on to a discussion of the provisions of the Senior Citizens and Disabled Protected Tenancy Act that are in issue here.

Until 1981, tenants in New Jersey were protected from eviction by provisions of the New Jersey Anti-Eviction Act, 1974 N.J.Laws ch. 49 (codified, as amended by 1975 N.J.Laws ch. 311, at N.J.Stat.Ann. Secs. 2A:18-61.1 to 61.12 (West Supp.1983)). That Act authorized evictions on thirteen prescribed grounds.1 One of these grounds was a conversion by the owner from rental housing to condominium form of ownership. N.J.Stat.Ann. Sec. 2A:18-61.1(k) (West Supp.1983). Eviction for that purpose, however, required that the owner satisfy several conditions.

An owner converting to condominium ownership must have served a notice of termination three years before the institution of any action for eviction. No action could be instituted until the existing lease expired. N.J.Stat.Ann. Sec. 2A:18-61.2(g) (West Supp.1983). Thus, the Act essentially contained a three-year minimum grace period before eviction. Tenants receiving a three-year notice could, during the eighteen months following its receipt, request that the owner offer to the tenant "the rental of comparable housing...." N.J.Stat.Ann. Sec. 2A:18-61.11(a) (West Supp.1983). Unless the owner located and offered comparable housing, New Jersey courts having jurisdiction over eviction actions were authorized to issue up to five one-year stays of eviction. Id. In practice, therefore, if the owner could not locate comparable housing for the tenant, the grace period before eviction could be extended from three to eight years. After the first stay of eviction, however, the owner could prevent further stays by paying to the tenant a "hardship relocation compensation" equal to five months' rent. N.J.Stat.Ann. Sec. 2A:18-61.11(c) (West Supp.1983). Therefore, after the fourth year following a termination notice--three years plus one stay--owners who could not locate comparable housing were faced with a choice: either they could make a payment to the tenant equal to five months' rent, and thereby prevent additional stays of eviction; or they could make no such payment and continue receiving rent from the tenant for up to four more years.

In addition to the Anti-Eviction Act, several New Jersey statutes governed the conversion of real property to the condominium form of ownership. The New Jersey Condominium Act, 1969 N.J.Laws ch. 257 (codified at N.J.Stat.Ann. Secs. 46:8B-1 to 30 (West Supp.1983)), provided for conversion of real property to the condominium form by the filing of a master deed meeting certain statutory requirements. N.J.Stat.Ann. Sec. 46:8B-8 (West Supp.1983). When such a master deed is filed, each unit becomes a separate interest in real property. N.J.Stat.Ann. Sec. 46:8B-4 (West Supp.1983). New Jersey also authorized the sale by condominium developers of units created by the filing of a master deed. See The Planned Real Estate Development Full Disclosure Act, 1977 N.J.Laws ch. 419 (codified at N.J.Stat.Ann. Secs. 45:22A-21 to 42 (West Supp.1983)). The Disclosure Act required that a public offering statement be filed with the New Jersey Department of Community Affairs. N.J.Stat.Ann. Sec. 45:22A-28 (West Supp.1983). The Act also authorized the Community Affairs Department to investigate a developer's application, and to register that application upon finding that the developer is likely to comply with the terms of the public offering statement. N.J.Stat.Ann. Secs. 45:22A-29-30 (West Supp.1983). The developer's right to offer units for sale to the public was qualified, however, by a provision of the Anti-Eviction Act requiring that tenants must be afforded notice of their option to purchase the units they occupy. N.J.Stat.Ann. Sec. 2A:18-61.8 (West Supp.1983).

On July 27, 1981, the New Jersey Legislature enacted the Tenancy Act. The Act's purpose is to enhance the protection of certain senior citizens and disabled persons against evictions resulting from condominium conversions. Legislative findings in the Act recite that the "forced eviction and relocation of elderly persons from their established homes and communities harm the mental and physical health of these senior citizens, ... affect adversely the social, economic and cultural characteristics of communities of the State, and increase the costs borne by all State citizens ...."2 Although these appeals concern challenges only to Section 14 of the Tenancy Act, various provisions of the Act are interrelated. These provisions fall into three categories: those sections creating a "protected tenancy period"; a section governing rent increases during that period; and a retroactivity section.

At the heart of the Tenancy Act is a provision in section 4 granting a "protected tenancy status" to "eligible" senior citizens and disabled tenants.3 Section 3 provides that an eligible "senior citizen tenant" is a tenant in a complex of five or more units who was at least 62 years of age on the date of recordation of the master condominium deed, and who occupied a unit as a principal residence for the prior two years, or who is the surviving spouse of such a tenant. N.J.Stat.Ann. Sec. 2A:18-61.24(a), (f) (West Supp.1983). A recent amendment to this section now provides that an eligible surviving spouse must be at least 50 years of age at the time of the condominium conversion. 1983 N.J.Laws ch. 389 (approved Dec. 2, 1983). An eligible "disabled tenant" is a tenant who, on the date of the conversion, was "totally and permanently unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment, including blindness ...." N.J.Stat.Ann. Sec. 2A:18-61.24(b) (West Supp.1983).

Eligible tenants may apply under section 7 to an administrative agency for "protected tenancy status" on or before the date of registration of conversion. These tenants qualify for protected tenancy status if their annual household income does not exceed three times the county per capita personal income level. N.J.Stat.Ann. Sec. 2A:18-61.28(c) (West Supp.1983). The "protected tenancy period" conferred by the Act on qualified tenants continues for forty years after the date of conversion. N.J.Stat.Ann. Sec. 2A:18-61.24(h) (West Supp.1983). No action for eviction may be brought against protected tenants during this period. N.J.Stat.Ann. Sec. 2A:18-61.1(k) (West Supp.1983). Thus, the effect of qualifying for a protected tenancy is to obtain the right to remain as a tenant in a converted unit for up to forty years beyond any period already authorized by the Anti-Eviction Act. A protected tenancy status may also be terminated. Section 11 of the Act provides that protected status shall be terminated if the unit is no longer the principal residence of the protected tenant, or if the annual household income of the protected tenant exceeds three times the most recently reported county per capita personal income level. N.J.Stat.Ann. Sec. 2A:18-61.32 (West Supp.1983).

The Tenancy Act also governs the magnitude of rent increases that developers may charge in order to recoup condominium conversion costs. Section 10 of the Act provides that in a municipality without a rent control ordinance in effect, the owner cannot use increased costs due to conversion as a justification for the conscionability of a rent increase in a suit for nonpayment of rent.4 N.J.Stat.Ann. Sec. 2A:28-61.31 (West Supp.1983). In municipalities with rent control ordinances in effect, the impact of the Tenancy Act is slightly different. In these communities, increased costs due to conversion cannot be used to justify a rent increase in a "fair return or hardship hearing" before a municipal rent board. Id. The Township of Springfield, New Jersey has such a rent control ordinance. That ordinance currently authorizes rent increases of six and one-half percent per year, subject to a number of adjustments. Two such adjustments authorize increases in "Rate of Return" and "hardship" hearings;5 in these hearings, evidence of increased costs due to conversion would evidently not be permitted. Other adjustments--for example, adjustments reflecting increased property taxes--operate automatically, without hearings; these adjustments would apparently permit the passing on of certain conversion costs.6

In sum, the applicable rules in Springfield Township permit a condominium owner to receive yearly rent increases of six and one-half percent from each tenant-occupied condominium during the duration of a protected tenancy, and appear to permit the pass-on of certain condominium conversion costs.

Section 14 of the Tenancy Act permits the retroactive application of the Act in certain circumstances. That section provides that in any action for a stay of eviction, for declaratory judgment, or in any other proceeding under the Anti-Eviction Act:

the court may invoke some or all of the provisions of the [Tenancy Act] and grant to a tenant, pursuant to that [Act], a protected tenancy period upon the court's determination that:

(1) The tenant would otherwise qualify as a senior citizen tenant or disabled tenant ... except that the building or structure in which the dwelling unit is located was converted prior to the effective date of that [Act]; and(2) The granting of the protected tenancy period as applied to the tenant, giving particular consideration to whether a unit was sold on or before the date that the [Act] takes effect to a bona fide individual purchaser who intended personally to occupy the unit, would not be violative of concepts of fundamental fairness or due process.

N.J.Stat.Ann. Sec. 2A:18-61.11(d) (West Supp.1983) (emphasis added). The effect of section 14 is to confer upon the New Jersey courts discretionary authority to recognize a protected tenancy status for certain senior citizens, their spouses, and certain disabled persons who could otherwise have been evicted under the Anti-Eviction Act on three years' notice plus the tender of comparable rental housing or hardship relocation compensation.

If a court declines to grant protected tenancy status, it may nonetheless authorize up to five one-year stays of eviction until comparable rental housing is provided. The owner does not, however, have the option to buy out the interest of the tenant with a "hardship relocation compensation" of five months' rent. Id.

II. Facts and Proceedings in the District Court

Troy Hills of Springfield is a garden apartment complex consisting of 342 residential units. Troy, Ltd. ("Troy") purchased the complex on October 1, 1979. At that time, the complex was occupied by rental tenants. On January 31, 1980, Troy contracted to sell the complex to East Coast Condo Tech, Inc. ("East Coast"), and to take back mortgages on the individual units that would be created by a condominium conversion. On February 28, 1980, Troy filed a master condominium deed, converting its ownership from a single fee to a number of condominium units. East Coast then filed a prospectus with the Department of Community Affairs, which the Department approved, pursuant to the Planned Real Estate Full Disclosure Act, in October of 1980. In January of 1981, East Coast served the three-year notices of eviction required by the Anti-Eviction Act on all tenants in the complex. The Troy-to-East-Coast closing took place on June 28, 1981, one month before the effective date of the Tenancy Act. East Coast became the owner of the separate units; Troy became the mortgagee of those units.

Many units were sold pursuant to the approved prospectus. Among the purchasers of these units are the four individual plaintiffs in this action, John F. King, Jr., Milton Snyder, Morton Weinberg, and Stephen Forman. Weinberg and Forman executed sales contracts for condominiums before the effective date of the Tenancy Act, but closed these sales after its effective date. King and Snyder both executed sales contracts and closed sales after the Act's effective date.

On November 6, 1981, Troy and East Coast filed this action seeking declaratory and injunctive relief against the enforcement of the Tenancy Act. The complaint named as defendants the New Jersey Community Affairs Commissioner and the Attorney General (the "state defendants") and three tenants who were alleged to claim benefits under the Act as senior citizens (the "tenant defendants"). Counts I and II challenged the rent-control and protected-tenancy provisions of the Act in their prospective application. Count III of the complaint attacked the retroactive operation of section 14. That count averred that section 14 constitutes an impairment of contract, and a taking of property without just compensation, in a variety of respects, principally by aborting the sale of condominium units occupied by tenants who qualify for a protected status, and by denying to the owners of these units "the recovery of the costs of operation and a fair return upon the value of the units." Compl. p 32, App. at 31-32. Count III also alleged a diminution in the value of the complex as security for any mortgage, and an impairment of the ability to obtain further financing on these units. Id.

At the time plaintiffs filed this complaint, the tenant-defendants had not obtained court orders declaring that they qualified for protected tenancy status. Arguing that the district court should not proceed without such a determination, the tenant-defendants filed a motion for abstention on April 10, 1982. The district court denied that motion on April 26. On May 25, Troy and East Coast moved to add the four individual investor-plaintiffs--King, Snyder, Weinberg, and Forman--and moved for partial summary judgment on due process, equal protection, and taking grounds. The state-defendants cross-moved for summary judgment on July 6. The tenant-defendants also filed a cross-motion for summary judgment seeking to dismiss the complaint "insofar as it alleges that [section 14] is unconstitutional."

On December 13, 1982, the district court entered partial summary judgment on that portion of the complaint alleging that the retroactive operation of section 14 violated the impairment of contract and taking clauses. Reasoning that the alterations authorized by the Act "amount to a serious disruption of the grantee's expectations," the district court held that section 14 violated the impairment of contract clause, as interpreted in United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). The court also held that because section 14 applied to premises already converted, it violated the federal constitutional prohibition against uncompensated takings, as interpreted in Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 102 S.Ct. 3164, 73 L.Ed.2d 868 (1982).

The district court's order certified that it involves a controlling question of law as to which there is substantial ground for difference of opinion, and that an immediate appeal from it may materially advance the ultimate termination of the litigation. On January 10, 1983, we granted leave to appeal under 28 U.S.C. 1292(b) (1976). We now reverse.

Article I, section 10 of the United States Constitution prohibits the states from passing a "Law impairing the Obligation of Contracts." Historically, the Supreme Court has analyzed quite differently the operation of that clause on contracts between private parties and states, on the one hand, and on contracts among private parties on the other. The district court's reliance on United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977), requires that we examine this longstanding distinction.

The contract clause is among those provisions of the Constitution addressing post-Revolutionary War state legislation purporting to repudiate obligations owed by local debtors to British and loyalist creditors. A number of states had, in evident violation of article IV of the 1783 Treaty of Peace, 8 Stat. 80, 82, enacted laws staying the time for payment of debts, making paper money legal tender, and sequestering debts due British creditors. See Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398, 454-61, 54 S.Ct. 231, 246-48, 78 L.Ed. 413 (1934) (Sutherland, J., dissenting); Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 204, 4 L.Ed. 529 (1819). Thus, article I, section 10 of the Constitution forbade the states from coining money, emitting bills of credit, making anything but gold and silver coin a tender for the payment of a debt, and "impairing the Obligation of Contracts." U.S. Const. art. I, Sec. 10, cl. 1.

Although the contract clause arose from the purported repudiation of contracts between private parties, the Supreme Court held in 1810 that the clause prohibited a state's repudiation of its own contracts as well. Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 137-39, 3 L.Ed. 162 (1810). Fidelity to the principle that "one legislature cannot abridge the powers of a succeeding legislature," id. at 134, 3 L.Ed. 162, soon, however, led to a relaxation of the rigor with which the Court scrutinized legislation decreasing the value of public contracts. See, e.g., Charles River Bridge v. Warren Bridge, 36 U.S. (11 Pet.) 420, 432, 9 L.Ed. 773 (1837) (charter to operate a bridge subject to legislative power to charter a competitor); Stone v. Mississippi, 101 U.S. 814, 817-20, 25 L.Ed. 1079 (1880) (state-chartered lottery company rendered valueless by subsequent abolition of lotteries); Fertilizing Co. v. Hyde Park, 97 U.S. 659, 667-70, 24 L.Ed. 1036 (1878) (value of state-chartered fertilizer company impaired by ordinance prohibiting transportation of fertilizer).

In contrast, laws alleged to impair the obligations of contracts between private parties were for many years scrutinized far more rigorously. These cases arose principally out of state efforts to provide relief for impecunious debtors. The Court consistently held that any state law retroactively modifying the obligations of debtors violated article I, section 10. See, e.g., Ogden v. Saunders, 25 U.S. (12 Wheat.) 212, 261-70, 6 L.Ed. 606 (1827) (Washington, J.); id. at 295 (Thompson, J.); id. at 326-27 (Trimble, J.); Green v. Biddle, 21 U.S. (8 Wheat.) 1, 84-85, 5 L.Ed. 547 (1823) ("[a]ny deviation from its terms ... however minute, or apparently immaterial ... impairs its obligation"); Sturges v. Crowninshield, 17 U.S. (4 Wheat.) 122, 207, 4 L.Ed. 529 (1819). The Court's doctrine that changes in the law of remedies could amount to an impairment of private contractual obligations placed fairly tight limits on the authority of states to grant relief to debtors by the manipulation of state remedial laws. See, e.g., Green v. Biddle, 21 U.S. (8 Wheat.) at 83-85, 5 L.Ed. 547 (lien on land for value of improvements impairs obligation of contract). In this sense, the Supreme Court treated the impairment of contract clause as the obverse of the grant of congressional authority in article I, section 8 of the Constitution to establish uniform laws on the subject of bankruptcies. U.S. Const. art. I, Sec. 8, cl. 4. Congress could, but the states could not, impair the obligation of undertakings by debtors. See Hanover National Bank v. Moyses, 186 U.S. 181, 188, 22 S.Ct. 857, 860, 46 L.Ed. 1113 (1902) ("The [Bankruptcy] grant to Congress involves the power to impair the obligation of contracts, and this the States were forbidden to do.").

In 1934 the Supreme Court took a historic step toward inverting the longstanding dichotomy between public and private contracts. In the significant case of Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934), the Court held that the contract clause should not be read as a serious impediment to state social and economic legislation affecting private contracts. Blaisdell examined a Minnesota mortgage moratorium law, enacted as an emergency measure during the great Depression, which extended the redemption period for mortgages. In sustaining the extended redemption period, the Court held for the first time that legislation retroactively affecting the value of an underlying contractual obligation did not violate the contract clause when enacted in pursuit of legitimate economic or social objectives. "The economic interests of the State," the Court held,

may justify the exercise of its continuing and dominant protective power notwithstanding interference with contracts.... The question is not whether legislation affects contracts incidentally, or directly or indirectly, but whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to the end.

290 U.S. at 437-38, 54 S.Ct. at 239-40. The Court characterized the power of economic and social legislation to affect private contractual arrangements as the "reserved power,"7 and noted that the states' reserved police powers and the contract clause must be construed in harmony with one another:

This principle precludes a construction which would permit the State to adopt as its policy the repudiation of debts or the destruction of contracts or the denial of means to enforce them. But it does not follow that conditions may not arise in which a temporary restraint of enforcement may be consistent with the spirit and purpose of the constitutional provision and thus be found to be within the range of the reserved power of the State to protect the vital interests of the community.

Id. at 439, 54 S.Ct. at 240. In subsequent cases, the Court enlarged the degree of deference accorded to state economic and social legislation affecting private contract rights. E.g., Veix v. Sixth Ward Building & Loan Ass'n, 310 U.S. 32, 37-39, 60 S.Ct. 792, 794-795, 84 L.Ed. 1061 (1940) (sustaining permanent legislation limiting withdrawal of funds from savings and loan associations); East New York Savings Bank v. Hahn, 326 U.S. 230, 233-35, 66 S.Ct. 69, 70-71, 90 L.Ed. 34 (1945) (approving tenth extension of mortgage moratorium). Under these post-Blaisdell authorities, the contract clause placed only limited inhibitions on the ability of state legislatures to address significant social problems by legislation affecting existing contractual undertakings between private parties.

In 1977, the Court completed the inversion begun in Blaisdell of its analyses of public and private contracts. In United States Trust Co. v. New Jersey, 431 U.S. 1, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977), the Supreme Court struck down state legislation repealing a covenant between the state of New Jersey and its bondholders pledging to limit mass transit deficits to a percentage of cash reserves and revenues of the transit authority. United States Trust was thus one of the long line of cases stretching back to Fletcher v. Peck, 10 U.S. (6 Cranch) 87, 3 L.Ed. 162 (1810), addressing efforts by the states to repudiate by subsequent legislation their own contractual undertakings. Despite early deference to such legislation, the Supreme Court in United States Trust applied a higher standard of scrutiny to state abrogations of their own contractual arrangements than to state efforts to modify purely private agreements. The Court reasoned that when the state is a party to the contract, "complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake." 431 U.S. at 26, 97 S.Ct. at 1519. In these cases, the Court held, it would apply a more exacting standard of scrutiny, examining whether "a less drastic modification would have" sufficed and whether the modification was reasonable in light of changed circumstances. Id. at 30-32, 97 S.Ct. at 1521-1522.

It is evident, therefore, that the district court erred in relying on United States Trust Co. v. New Jersey. That case is one of many from age to age dealing with the abrogation of contractual terms between a state and private parties. The higher standard of United States Trust is not relevant to the disposition of this case, which poses the very different problem of legislation allegedly impairing the obligation of contracts between private parties. The appropriate line of authority for this issue is that of Home Building & Loan Ass'n v. Blaisdell and its progeny, and it is to that line of cases that we now turn.

The most recent authority in the line of cases addressing state legislation affecting private contracts is the Supreme Court's decision last term in Energy Reserves Group, Inc. v. Kansas Power and Light Co., --- U.S. ----, 103 S.Ct. 697, 74 L.Ed.2d 569 (1983). In Energy Reserves, the Court considered an impairment-of-contracts challenge to a Kansas statute imposing price ceilings on newly discovered gas. These price ceilings were lower than those which would otherwise have been charged under a long-term supply contract. Justice Blackmun's opinion for a unanimous Court is significant in several respects. First, the Court reiterated the distinction, noted above, between the level of scrutiny applicable under United States Trust Co. to impairments when the state itself is a contracting party, and the level of scrutiny applied to other economic and social legislation. 103 S.Ct. at 705-06 & n. 14. Second, the Court drew the analyses of its prior cases into a three-step investigation.

The threshold inquiry is whether the state law has operated " 'as a substantial impairment of a contractual relationship.' " Id. at 704-05, quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244, 98 S.Ct. 2716, 2722, 57 L.Ed.2d 727 (1978).8 If the state law is found to be a "substantial impairment," then a second inquiry is required: "the State, in justification, must have a significant and legitimate public purpose behind the regulation ... such as the remedying of a broad and general social or economic problem." Id. 103 S.Ct. at 705. Finally, if such a legitimate public purpose is identified, a third query is posed: "the next inquiry is whether the adjustment of 'the rights and responsibilities of contracting parties [is based] upon reasonable conditions and [is] of a character appropriate to the public purpose justifying [the legislation's] adoption.' " Id., quoting United States Trust Co., 431 U.S. at 22, 97 S.Ct. at 1517. It is at this third stage that the distinction introduced in United States Trust enters:

Unless the State itself is a contracting party, ... "[a]s is customary in reviewing economic and social regulation, ... courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure."

Energy Reserves Group, 103 S.Ct. at 705-06, quoting United States Trust Co., 431 U.S. at 22-23, 97 S.Ct. at 1517-1518.

We have no doubt that the 1981 Tenancy Act passes muster under the contract clause as interpreted in Energy Reserves Group. First, it is doubtful that any impairment of a contractual relationship has occurred. The Tenancy Act only enlarged, for senior citizens and the disabled, a preexisting statutory tenancy which came into operation as a matter of law. Prior to the enactment of the Tenancy Act,