Gaston Board of Realtors, Inc. v. Harrison

Judge JOHNSON

dissenting.

I am troubled by the majority’s opinion in a number of respects, but most of all by that portion which holds that the law of the land clause in Article I, § 19 of the North Carolina Constitution guarantees a member of a private voluntary association “procedural due process” when that association undertakes disciplinary proceedings pursuant to its by-laws or rules of membership. In my opinion, such a novel departure in our constitutional jurisprudence is wholly unnecessary to decide the merits of this appeal and unwise as a matter of constitutional law and public policy. Furthermore, after having initially concluded that the defendant in this case has no substantive due process right to membership in the plaintiff organization, the majority reasoned that, nevertheless, defendant is entitled to procedural due process when that organization seeks his expulsion, noting that expulsion may harm the defendant professionally and economically. It would appear that either the law of the land clause of the North Carolina Constitution mandates that defendant is entitled to both procedural and substantive due process in a case such as this, or that he is entitled to none at all. However, it is impossible to separate the two aspects of the due process guaranty of “fundamental fairness,” and, in my opinion, the guarantees of the law of the land clause simply do not apply when a private organization seeks to expel one of its members.

*36 Art. I, § 19 of the North Carolina Constitution states:

No person shall be taken, imprisoned, or disseized of his freehold, liberties, or privileges, or outlawed, or exiled, or in any manner deprived of his life, liberty, or property, but by the law of the land. No person shall be denied the equal protection of the laws; nor shall any person be subjected to discrimination by the State because of race, color, or religion, or national origin.

Noticeably absent from the language of the law of the land clause is the phrase “by the State,” which is contained in both the equal protection clause of Art. I, § 19 and, by similar language, in the due process and equal protection clauses of the Fourteenth Amendment to the United States Constitution, giving rise to the “state action” requirement. However, my research has disclosed no prior North Carolina decision in which Art. I, § 19 has been interpreted to bind private citizens in their relations with one another. See e.g. State v. Avent, 253 N.C. 580 , 118 S.E. 2d 47 (1961), vacated on other grounds, 373 U.S. 375 , 10 L.Ed. 2d 420 , 83 S.Ct. 1311 (1963). Moreover, in the case of private associations, such an interpretation would give rise to serious constitutional questions regarding freedom of association under the First and Fourteenth Amendments to the United States Constitution.

As a preliminary matter, there is some doubt in my mind as to whether the defendant’s threat to take action to protect himself creates a controversy sufficient to invoke jurisdiction of the court under the declaratory judgment statutes. Section 20(i) of the plaintiffs Code of Ethics and Arbitration Manual states that, “A decision of the Directors is final and each member by becoming and remaining a member agrees not to seek review in any court of law.” For purposes of the declaratory judgment act, a “controversy” exists, and jurisdiction will lie, where the court is convinced that litigation appears to be unavoidable. Consumers Power, Inc. v. Duke Power Co., 285 N.C. 434 , 206 S.E. 2d 178 (1974). Inasmuch as defendant is actively seeking to retain his membership in plaintiff association, it would appear that the likelihood of defendant seeking judicial review of the Board’s decision, at the cost of his membership, is significantly diminished by Section 20(i).

*37 Furthermore, the admitted factual basis for defendant’s expulsion is the defendant’s alleged failure to comply with his contract of 23 October 1978 with the Hamricks. Specifically, because of his failure to make “full restitution” to the Hamricks of their $2,090.00 down payment. Thus, resolution of the dispute between plaintiff and defendant turns, as a factual matter, almost exclusively on the question of whether or not defendant breached his contract with the Hamricks. If defendant did not breach the 23 October 1978 contract, he was entitled by its terms to retain the Hamricks’ down payment, or at least that portion of the deposit which represents the costs defendant incurred in attempting to procure the loan. Subsequent to the filing of the declaratory judgment, but prior to the hearing before Judge Owen, defendant filed an interpleader action against the Hamricks (Harrison Realty of Gastonia, Inc. v. General Homes Corp., and Larry E. Hamrick and Phyllis M. Hamrick, 81CVD 2662). Pursuant to that action, defendant deposited the disputed $2,090.00 sum with the Clerk of Superior Court, Gaston County. The payment to the clerk in the interpleader action is irrevocable. Therefore, the issue of whether the Hamricks or the defendant breached the contract, and whether restitution is due, was before a court of competent jurisdiction. The hearing panel’s recommendation, adopted by the Board, stated that defendant be “expelled from membership until such times as he makes full restitution to the Complainants, Larry E. Hamrick and Phyllis M. Hamrick, at which time he may be automatically reinstated.” In his brief, defendant argues that the outcome of the subsequent interpleader action will render moot the question presented by plaintiffs complaint in this action, that is, whether “plaintiffs decision to expel the defendant is lawful and proper.”

Assuming for the moment that our courts do have subject matter jurisdiction to review the Board’s decision, in my view, a proper review must at least encompass a determination that the decision was rational, that is, reasonably related to the legitimate professional purposes of the Board, and not contrary to public policy. Should it be determined in the interpleader action that defendant is not legally obligated to make restitution to the Hamricks, I would be unable to conclude that the Board’s substantive decision to expel defendant until he made such restitution was a rational one, which was, therefore, “lawful and proper.” *38 These considerations may not necessarily render the question of whether the Board properly followed its own disciplinary procedures in this case moot, but an adjudication of defendant’s rights under his contract with the Hamricks would certainly answer the factual question before the Board and the court. Therefore, the better procedure to follow in a case such as this would be to retain jurisdiction of the declaratory judgment action pending the outcome of defendant’s interpleader action against the Hamricks.

Returning to the question of subject matter jurisdiction, it would appear that the larger questions presented by this appeal concern the legal basis for the defendant-member’s right to judicial review of the acts of plaintiff-professional association and the degree to which the courts of this state may intervene in the internal affairs of a private professional association. The traditional theories for judicial review of disputes involving associations are extensively discussed in Developments in the Law, Judicial Control of Actions of Private Associations, 76 Harv. L. Rev. 983 , 998-1006 (1963). These include: (1) the deprivation of a property interest; (2) the existence of a consensual relationship between the member and the group, the group’s rules serving as the terms of a contract; (3) the fiduciary duties of associations to both members and non-members; and (4) tort theories which focus on the group decision’s impact on the member’s reputation and its interference with advantageous economic relations. In Bullard v. Austin Real Estate Board, Inc., 376 S.W. 2d 870 (Tex. Civ. App. 1964), cited by the majority, the court stated that one of the bases for judicial intervention in expulsion proceedings before a professional association is the fact that an expulsion was in “violation of the principles of natural justice.” 376 S.W. 2d at 874 . See also Tobriner & Grodin, The Individual and the Public Service Enterprise in the New Industrial State, 55 Cal. L. Rev. 1247 , 1251-1254 (the proper legal basis for judicial intervention is the “status” relationship between the individual and a “public service” enterprise).

Although there is a divergence of opinion as to the precise legal basis for judicial intervention, there is a general agreement that membership in a professional society, trade or business association, including a board of real estate brokers, is a valuable right, and such membership cannot be terminated or interfered *39 with contrary to the fundamental requirements of the common law. See e.g. Cunningham v. Burbank Board of Realtors, 68 Cal. Rptr. 653 , 262 Cal. App. 2d 211 (1968); Swital v. Real Estate Commissioner, 116 Cal. App. 2d 677 , 254 P. 2d 587 (1953); McCune v. Wilson, 237 So. 2d 169 (Fla. 1970); Multiple Listing Service of Jackson, Inc. v. Century 21 Cantrell Real Estate, 390 So. 2d 982 (Miss. 1980). See also Chaffee, The Internal Affairs of Associations Not for Profit, 43 Harv. L. Rev. 993 , 1021-1029 (1930) (there are four basic policies to consider when determining whether judicial interference in the affairs of a particular type of association is warranted: the Strangle-hold Policy, the Dismal Swamp Policy, the Hot Potato Policy, and the Living Tree Policy; the first favors intervention, the last three weigh against it).

There is also general agreement that the need for group autonomy from unwarranted judicial intrusion and the desirability of group self-regulation mandates limiting the scope of judicial review generally to the enforcement of the association’s own rules and to questions involving the basic fairness of the procedure whereby the member was disciplined. See e.g. Cunningham v. Burbank Board of Realtors, supra; McCune v. Wilson, supra; Terrell v. Palomino Horse Breeders of America, 414 N.E. 2d 332 (Ind. App. 1980).

In Pinsker v. Pacific Coast Society of Orthodontists, 12 Cal. 3d 541 , 116 Cal. Rptr. 245 , 526 P. 2d 253 (1974), the California Supreme Court reasoned that professional associations which wield monopoly power and affect sufficiently significant economic and professional concerns are clothed with a “public interest,” even though it cannot be said that membership is a strict “economic necessity.” The court, following a thorough review of common law precedents in this area, concluded that the overriding principle is that “once it is determined the judicial scrutiny of a particular decision is justified to protect against arbitrary action, such overview includes an evaluation of both the substantive and procedural aspects of the association’s decision.” 526 P. 2d at 261 . In other words, the proscription of “arbitrary” expulsions or rejections prohibits such actions pursuant to unfair procedure as well as actions based on irrational or improper reasons. Accord Dietz v. American Dental Association, 479 F. Supp. 554 (E. D. Mich. 1979). In Dietz, the court stated the rule as follows:

*40 Where a professional association has monopoly power and membership in the association significantly affects the member’s practice of his profession, courts will hold the association has a fiduciary duty to be substantively rational and procedurally fair. The association must exercise its powers according to its by-laws and constitution; it cannot decide to exclude or expel a member or deny rights of membership for arbitrary, capricious, or discriminatory reasons. (Citations omitted.)

479 F. Supp. at 557 .

The defendant in this case is alleged to have violated Article 3 of plaintiff’s Code of Ethics by his failure to return the Hamricks’ deposit. Article 3 states, in pertinent part:

It is the duty of the REALTOR to protect the public against fraud, misrepresentation, and unethical practices in real estate transactions.

In my opinion, the trial court failed to conduct a proper judicial review of the substantive rationality of the Board’s decision. Such a determination would, of course, either be made simpler or would be completely obviated by the resolution of the in-terpleader action between defendant and the Hamricks. The rule that a court should not reweigh the facts and substitute its judgment for that of the association, implicit in the majority opinion, is not directly applicable to this case. The rationale for this rule is to prevent the court from deciding certain types of issues which are best left to the membership of the association whose competence exceeds the court’s with regard to that particular issue. See Pinsker, supra; Blende v. Maricopa County Medical Society, 96 Ariz. 240 , 393 P. 2d 926 (1964). Professor Chaffee, in his seminal article on private associations, has characterized judicial review in such cases (e.g. intra-church disputes) as “an appeal from a learned body to an unlearned body,” and hasty judicial intervention as an eager rush into the “Dismal Swamp of obscure rules and doctrines.” 43 Harv. L. Rev. at 1024. Certainly a higher degree of judicial scrutiny of association decisions is justifiable and permissible when the question is whether a breach of a real estate contract constituted a violation of Article 3 of the plaintiffs Code of Ethics. In view of the substantial economic control the Board exerts over this defendant’s ability to practice his *41 profession, the Board owes him a fiduciary duty and he is, therefore, entitled to a judicial determination that the Board’s substantive decision was based upon substantial evidence, was rational, that is, reasonably related to legitimate professional purposes of the Board, was made in good faith, and was not contrary to public policy.

In conclusion, the proper legal basis for judicial review of the decision of plaintiff Board to expel defendant from membership lies in the common law rule that such private professional associations must refrain from arbitrary action and the proper scope of judicial review that the action taken or proposed is both substantively rational and procedurally fair. The trial court refused to consider evidence relative to the substantive rationality of the Board’s decision and made no findings or conclusions on that issue. For this reason, I would vacate the court’s judgment and remand the case to the trial court for a new trial.