UNICO, A PARTNERSHIP OF NEW JERSEY v. JAMES F. OWEN
Supreme Court of New Jersey
50 N.J. 101; 232 A.2d 405; 1967 N.J. LEXIS 160; 4 U.C.C. Rep. Serv. (Callaghan) 542
November 21, 1966, Argued  July 31, 1967, Decided


The issue to be decided here is whether plaintiff Unico, a New Jersey partnership, is a holder in due course of defendant's note. If so, it is entitled to a judgment for the unpaid balance due thereon, for which this suit was brought. The District Court found plaintiff was not such a holder and that it was therefore subject to the defense interposed by defendant, maker of the note, of failure of consideration on the part of the payee, which endorsed it to plaintiff. Since it was undisputed that the payee failed to furnish the consideration for which the note was given, judgment was entered for defendant. The Appellate Division affirmed, and we granted plaintiff's petition for certification in order to consider the problem.

The facts are important. Defendant's wife, Jean Owen, answered an advertisement in a Newark, N.J. newspaper in which Universal Stereo Corporation of Hillside, N.J., offered for sale 140 albums of stereophonic records for $ 698. This amount could be financed and paid on an installment basis. In addition the buyer would receive "without separate charge" (as plaintiff puts it) a Motorola stereo record player. The plain implication was that on agreement to purchase 140 albums, the record player would be given free. A representative of Universal called at the Owens' home and discussed the matter with Mr. and Mrs. Owen. As a result, on November 6, 1962 they signed a "retail installment contract" for the purchase of 140 albums on the time payment plan proposed by Universal.

Under the printed form of contract Universal sold and Owen bought "subject to the terms and conditions  stipulated in Exhibit 'A' hereto annexed and printed on the other side hereof and made part hereof, the following goods * * *: 12 stereo albums to be delivered at inception of program and every 6 months thereafter until completion of program," a "new Motorola consolo [sic]" and "140 stereo albums of choice * * *." The total cash price was listed as $ 698; a down-payment of $ 30 was noted; the balance of $ 668, plus an "official fee" of $ 1.40 and a time price differential of $ 150.32, left a time balance of $ 819.72 to be paid in installments. Owen agreed to pay this balance in 36 equal monthly installments of $ 22.77 each beginning on December 12, 1962, "at the office of Universal Stereo Corp., 8 Hollywood Avenue, Hillside, N.J., or any other address determined by assignee."

Exhibit "A," referred to as being on the reverse side of the contract, is divided into three separate parts, the body of each part being in very fine print. The first section sets out in 11 fine print paragraphs the obligations of the buyer and rights of the seller. Under paragraph 1 the seller retains title to the property until the full time price is paid. Paragraph 2 says that the term "Seller" as used shall refer to the party signing the contract as seller "or if said party has assigned said contract, any holder of said contract." It is patent that Universal contemplated assigning the contract forthwith to Unico, and it was so assigned. Of course, it was a bilateral executory contract, and since under the language just quoted "assignee" and "seller" have the same connotation, the reasonable and normal expectation by Owen would be that performance of the delivery obligation was a condition precedent to his undertaking to make installment payments. Universal sought under paragraph 5 to deprive Owen of his right to plead failure of consideration against its intended assignee, Unico. The paragraph provides:

"Buyer hereby acknowledges notice that the contract may be assigned and that assignees will rely upon the agreements contained in this paragraph, and agrees that the liability of the Buyer to any assignee shall be immediate and absolute and not affected by any default whatsoever of the Seller signing this contract; and in order to induce assignees to purchase this contract, the Buyer further agrees not to set up any claim against such Seller as a defense, counterclaim or offset to any action by any assignee for the unpaid balance of the purchase price or for possession of the property."

The validity and efficacy of this paragraph will be discussed hereinafter. At this point it need only be said that the design of Universal in adopting this form of contract and presenting it to buyers, not for bargaining purposes but for signature, was to get the most and give the least. Overall it includes a multitude of conditions, stipulations, reservations, exceptions and waivers skillfully devised to restrict the liability of the seller within the narrowest limits, and to leave no avenue of escape from liability on the part of the purchaser.

There follows an elaborate fine-print form of assignment of the contract and the rights thereunder to Unico, which name is part of the printed form.

At this point the hyper-executory character of the performance agreed to by Universal in return for the installment payment stipulation by Owen must be noted. Owen's time balance of $ 819.72 was required to be paid by 36 monthly installments of $ 22.77 each. Universal's undertaking was to deliver 24 record albums a year until 140 albums had been delivered. Completion by the seller therefore would require 5-1/3 years. Thus, although Owen would have fully paid for 140 albums at the end of three years, Universal's delivery obligation did not have to be completed until 2-1/3 years thereafter. This means that 40% of the albums, although fully paid for, would still be in the hands of the seller. It means also that for 2-1/3 years Universal would have the use of 40% of Owen's money on which he had been charged the high time-price differential rate. In contrast, since Universal discounted the note immediately with Unico on the strength of Owen's credit and purchase contract, the transaction, so far as the seller is concerned, can fairly be considered as one for cash. In this posture, Universal had its sale price almost contemporaneously with Owen's execution of the contract, in return for an executory performance to extend over 5-1/3 years. And Unico acquired Owen's note which, on its face and considered apart from the remainder of the transaction, appeared to be an unqualifiedly negotiable instrument. On the other hand, on the face of things, by virtue of the ostensibly negotiable note and the waiver or estoppel clause quoted above which was intended to bar any defense against an assignee for the seller's default, Owen had no recourse and no protection if Universal defaulted on its obligation and was financially worthless.

Owen's installment note to Universal for the time balance of $ 819.72 is dated November 6, 1962. Although the endorsement on the reverse side is not dated, Unico concedes the note was received on or about the day it was made. The underlying sale contract was assigned to Unico at the same time, and it is admitted that Owen was never notified of the assignment.

Owen received from Universal the stereo record player and the original 12 albums called for by the contract. Although he continued to pay the monthly installments on the note for the 12 succeeding months, he never received another album. During that period Mrs. Owen endeavored unsuccessfully to communicate with Universal, and finally ceased making payments when the albums were not delivered. Nothing further was heard about the matter until July 1964, when the attorney for Unico, who was also one of its partners, advised Mrs. Owen that Unico held the note and that payments should be made to it. She told him the payments would be resumed if the albums were delivered. No further deliveries were made because Universal had become insolvent. Up to this time Owen had paid the deposit of $ 30 and 12 installments of $ 22.77 each, for a total of $ 303.24. Unico brought this suit for the balance due on the note plus penalties and a 20% attorney's fee.

Owen defended on the ground that Unico was not a holder in due course of the note, that the payment of $ 303.24 adequately satisfied any obligation for Universal's partial performance, and that Universal's default and the consequent failure of consideration barred recovery by Unico. As we have said, the trial court found plaintiff was not a holder in due course of the note and that Universal's breach of the sales contract barred recovery.

I

This brings us to the primary inquiry in the case. Is the plaintiff Unico a holder in due course of defendant's note?

The defendant's note was executed on November 6, 1962. The Uniform Commercial Code, N.J.S. 12A:1-101 et seq., was adopted by the Legislature in 1961, but it did not become operative until January 1, 1963. The note, therefore, is governed by the Uniform Negotiable Instruments Law, N.J.S.A. 7:1-1 et seq. Section 52 thereof defined a holder in due course as one who (among other pre-requisites) took the instrument "in good faith and for value." If plaintiff is not a holder in due course it is subject to the defense of failure of consideration on the part of Universal, both under the Negotiable Instruments Law, N.J.S.A. 7:2-58, and the Uniform Commercial Code, N.J.S. 12A:3-306(c).

In the field of negotiable instruments, good faith is a broad concept. The basic philosophy of the holder in due course status is to encourage free negotiability of commercial paper by removing certain anxieties of one who takes the paper as an innocent purchaser knowing no reason why the paper is not as sound as its face would indicate. It would seem to follow, therefore, that the more the holder knows about the underlying transaction, and particularly the more he controls or participates or becomes involved in it, the less he fits the role of a good faith purchaser for value; the closer his relationship to the underlying agreement which is the source of the note, the less need there is for giving him the tension-free rights considered necessary in a fast-moving, credit-extending commercial world.

We are concerned here with a problem of consumer goods financing. Such goods are defined in the Uniform Commercial Code as those used or bought for use primarily for personal, family or household purposes. Although the Code as such is not applicable in this case, the definition is appropriate for our purposes. And it is fair to say also that in today's society, sale of such goods and arrangements for consumer credit financing of the sale are problems of increasing state and national concern. The consumer-credit market is essentially a process of exchange, the general nature of which is shaped by the objectives and relative bargaining power of each of the parties. In consumer goods transactions there is almost always a substantial differential in bargaining power between the seller and his financer, on the one side, and the householder on the other. That difference exists because generally there is a substantial inequality of economic resources between them, and of course, that balance in the great mass of cases favors the seller and gives him and his financer the power to shape the exchange to their advantage. Their greater economic resources permit them to obtain the advice of experts; moreover, they have more time to reflect about the specific terms of the exchange prior to the negotiations with the consumer; they know from experience how to strengthen their own position in consumer-credit arrangements; and the financer-creditor is better able to absorb the impact of a single imprudent or unfair exchange.

 Mass marketing in consumer goods, as in many other commercial activities, has produced standardized financing contracts. As a result there is no real arms-length bargaining between the creditor (seller-financer) and the consumer, beyond minimal negotiating about amount of credit, terms of installment payment and description of the goods to be purchased, all of which is accomplished by filling blanks left in the jungle of finely printed, creditor-oriented provisions. In the present case the purchase contract was a typical standardized finely printed form, focused practically in its entirety upon the interests of the seller and its intended assignee. Little remained to be done but to describe the stereo record player and to fix the price and terms of installment payment by filling in the blanks. Even as to the matter inserted in the blanks, it cannot be said that there was any real bargaining; the seller fixed the price of the albums, and, as we shall see, the plaintiff Unico as the financer for Universal established the maximum length of the installment payment period under its contract with Universal. The ordinary consumer goods purchaser more often than not does not read the fine print; if he did it is unlikely that he would understand the legal jargon, and the significance of the clauses is not explained to him. This is not to say that all such contracts of adhesion are unfair or constitute imposition. But many of them are, and the judicial branch of the government within its sphere of operation in construing and applying such contracts must be responsive to equitable considerations. As the late Mr. Justice Frankfurter said in United States v. Bethlehem Steel Corp. (1942):

"But is there any principle which is more familiar or more firmly embedded in the history of Anglo-American law than the basic doctrine that the courts will not permit themselves to be used as instruments of inequity and injustice? Does any principle in our law have more universal application than the doctrine that courts will not enforce transactions in which the relative positions of the parties are such that one has unconscionably taken advantage of the necessities of the other?"

Just as the community has an interest in insuring (usually by means of the legislative process) that credit financing contracts facilitating sales of consumer goods conform to community-imposed standards of fairness and decency, so too the courts, in the absence of controlling legislation, in applying the adjudicatory process must endeavor, whenever reasonably possible, to impose those same standards on principles of equity and public policy. An initial step in that direction of unquestioned need, and fortunately of common judicial acceptance, is the view that consumer goods contracts and their concurrent financing arrangements should be construed most strictly against the seller who imposed the contract on the buyer, and against the finance company which participated in the transaction, directly or indirectly, or was aware of the nature of the seller's consumer goods sales and installment payment operation.

The courts have recognized that the basic problem in consumer goods sales and financing is that of balancing the interest of the commercial community in unrestricted negotiability of commercial paper against the interest of installment buyers of such goods in the preservation of their normal remedy of withholding payment when, as in this case, the seller fails to deliver as agreed, and thus the consideration for his obligation fails. Many courts have solved the problem by denying to the holder of the paper the status of holder in due course where the financer maintains a close relationship with the dealer whose paper he buys; where the financer is closely connected with the dealer's business operations or with the particular credit transaction; or where the financer furnishes the form of sale contract and note for use by the dealer, the buyer signs the contract and note concurrently, and the dealer endorses the note and assigns the contract immediately thereafter or within the period prescribed by the financer. Other courts have said that when the financer supplies or prescribes or approves the form of sales contract, or conditional sale agreement, or chattel mortgage as well as the installment payment note (particularly if it has the financer's name printed on the face or in the endorsement), and all the documents are executed by the buyer at one time and the contract assigned and note endorsed to the financer and delivered to the financer together, the holder takes subject to the rights and obligations of the seller. The transaction is looked upon as a species of tripartite proceeding, and the tenor of the cases is that the financer should not be permitted "to isolate itself behind the fictional fence" of the Negotiable Instruments Law, and thereby achieve an unfair advantage over the buyer.

Before looking at the particular circumstances of the above cases, it seems advisable to examine into the relationship between Universal and the financer Unico.

Unico is a partnership formed expressly for the purpose of financing Universal Stereo Corporation, and Universal agreed to pay all costs up to a fixed amount in connection with Unico's formation. The elaborate contract between them, dated August 24, 1962, recited that Universal was engaged in the merchandising of records and stereophonic sets, and that it desired to borrow money from time to time from Unico, "secured by the assignment of accounts receivable, promissory notes, trade acceptances, conditional sales contracts, chattel mortgages, leases, installment contracts, or other forms of agreement evidencing liens." Subject to conditions set out in the agreement, Unico agreed to lend Universal up to 35% of the total amount of the balances of customers' contracts assigned to Unico subject to a limit of $ 50,000, in return for which Universal submitted to a substantial degree of control of its entire business operation by the lender. As collateral security for the loans, Universal agreed to negotiate "to the lender" all customers' notes listed in a monthly schedule of new sales contracts, and to assign all conditional sale contracts connected with the notes, as well as the right to any monies due from customers.

Specific credit qualifications for Universal's record album customers were imposed by Unico; requirements for the making of the notes and their endorsement were established, and the sale contracts had to be recorded in the county recording office. All such contracts were required to meet the standards of the agreement between lender and borrower, among them being that the customer's installment payment term would not exceed 36 months and "every term" of the Unico-Universal agreement was to "be deemed incorporated into all assignments" of record sales contracts delivered as security for the loans. It was further agreed that Unico should have all the rights of Universal under the contracts as if it were the seller, including the right to enforce them in its name, and Unico was given an irrevocable power to enforce such rights.

In the event of Universal's default on payment of its loans, Unico was authorized to deal directly with the record buyers with respect to payment of their notes and to settle with and discharge such customers. Unico was empowered to place its representatives on Universal's premises with full authority to take possession of the books and records; or otherwise, it could inspect the records at any time; and it was given a "special property interest" in such records. Financial statements were required to be submitted by Universal "at least semi-annually"; and two partners of Unico were to be paid one-quarter of one per cent  interest on the loans as a management service charge, in addition to the interest to be paid Unico. Significant also in connection with the right to oversee Universal's business is a warranty included in the contract. It warrants that Universal owns free and clear "all merchandise referred to and described in [the sales] contracts, * * * at the time of making the sale creating such contracts." Obviously this was not the fact, otherwise Universal would not have discontinued shipping records to its customers, such as Owen. If Universal did not have such a store of records, as warranted, Unico might well have had reason to suspect its borrower's financial stability.

This general outline of the Universal-Unico financing agreement serves as evidence that Unico not only had a thorough knowledge of the nature and method of operation of Universal's business, but also exercised extensive control over it. Moreover, obviously it had a large, if not decisive, hand in the fashioning and supplying of the form of contract and note used by Universal, and particularly in setting the terms of the record album sales agreement, which were designed to put the buyer-consumer in an unfair and burdensome legal strait jacket and to bar any escape no matter what the default of the seller, while permitting the note-holder, contract-assignee to force payment from him by enveloping itself in the formal status of holder in due course. To say the relationship between Unico and the business operations of Universal was close, and that Unico was involved therein, is to put it mildly. There is no case in New Jersey dealing with the contention that the holder of a consumer goods buyer's note in purchasing it did not meet the test of good faith negotiation because the connection between the seller and the financer was as intimate as in this case.

There is a conflict of authority in other jurisdictions, but we are impelled for reasons of equity and justice to join those courts which deny holder in due course status in consumer goods sales cases to those financers whose involvement with the seller's business is as close, and whose knowledge of the extrinsic factors -- i.e., the terms of the underlying sale agreement -- is as pervasive, as it is in the present case. Their reasoning is particularly persuasive in this case because of the unusually executory character of the seller's obligation to furnish the consideration for the buyer's undertaking.

In our judgment the views expressed in the cited cases provide the sound solution for the problem under consideration. Under the facts of our case the relationship between Unico and Universal, and the nature of Unico's participation in Universal's contractual arrangements with its customers, if anything are closer and more active than in any of those cases, and in justice Unico should not be deemed a holder in due course of the Owen note.

For purposes of consumer goods transactions, we hold that where the seller's performance is executory in character and when it appears from the totality of the arrangements between dealer and financer that the financer has had a substantial voice in setting standards for the underlying transaction, or has approved the standards established by the dealer, and has agreed to take all or a predetermined or substantial quantity of the negotiable paper which is backed by such standards, the financer should be considered a participant in the original transaction and therefore not entitled to holder in due course status.

II

Plaintiff argues that even if it cannot be considered a holder in due course of Owen's note, it is entitled to recover regardless of the failure of consideration on the part of Universal, because of the so-called waiver of defenses or estoppel clause contained in the sale contract. The clause says:

"Buyer hereby acknowledges notice that this contract may be assigned and that assignees will rely upon the agreements contained in this paragraph, and agrees that the liability of the Buyer to any assignee shall be immediate and absolute and not affected by any default whatsoever of the Seller signing this contract; and in order to induce assignees to purchase this contract, the Buyer further agrees not to set up any claim against such Seller as a defense, counterclaim or offset to any action by any assignee for the unpaid balance of the purchase price or for possession of the property."

This provision is the fifth of 11 fine print paragraphs on the reverse side of the sale contract. The type is the same as in the other clauses; there is no emphasis put on it in the context, and there is no evidence that it was in any way brought to Owen's attention or its significance explained to him. But regardless, we consider that the clause is an unfair imposition on a consumer goods purchaser and is contrary to public policy.

The plain attempt and purpose of the waiver is to invest the sale agreement with the type of negotiability which under the Negotiable Instruments Law would have made the holder of a negotiable promissory note a holder in due course and entitled to recover regardless of the seller-payee's default.

Such contracts, particularly those of the type involved in this case, are so fraught with opportunities for misuse that the purchasers must be protected against oppressive and unconscionable clauses. And section 9-206 in the area of consumer goods sales must as a matter of policy be deemed closely linked with section 2-302, N.J.S. 12A:2-302, which authorizes a court to refuse to enforce any clause in a contract of sale which it finds is unconscionable. We see in the enactment of these two sections of the Code an intention to leave in the hands of the courts the continued application of common law principles in deciding in consumer goods cases whether such waiver clauses as the one imposed on Owen in this case are so one-sided as to be contrary to public policy. Cf. Williams v. Walker-Thomas Furniture Co., 350 F. 2d 445 (1965). For reasons already expressed, we hold that they are so opposed to such policy as to require condemnation. As the New Jersey Study Comment to section 2-302 indicates, the practice of denying relief because of unconscionable circumstances has long been the rule in this state.

For the reasons stated, we hold the waiver clause unenforceable and invalid against Owen.

III

We agree with the result reached in the tribunals below. Plaintiff offered no proof in the trial court to show that the value of the 12 albums Owen received before breach of the contract by Universal, together with that of the record player at the time of the breach (assuming its value was material in view of the seller's representation that there was to be no charge for it), was in excess of the $ 303.24 paid by Owen under the contract. Moreover, there has been no suggestion throughout this proceeding that plaintiff is entitled to a partial recovery on the note in its capacity as an assignee thereof. Accordingly, the judgment for the defendant is affirmed.