For affirmance -- Chief Justice Weintraub and Justices Jacobs, Francis, Proctor, Hall and Haneman. For reversal -- None. The opinion of the court was delivered by Francis, J.
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. 47 N.J. 241 (1966).
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." The contract provided:
"If the Buyer executed a promissory note of even date herewith in the amount of the time balance indicated, said note is not in payment thereof, but is a negotiable instrument separate and apart from this contract even though at the time of execution it may be temporarily attached hereto by perforation or otherwise."
It was part of Universal's practice to take notes for these contracts, and obviously there was no doubt that it would be done in the Owen case. Owen did sign a printed form of note which was presented with the contract. The name of Universal Stereo Corporation was printed thereon, and the note provided for the monthly installment payments specified. On the reverse side was an elaborate printed form of endorsement which began "Pay to the order of Unico, 251 Broad St., Elizabeth, New Jersey, with full recourse;" and which contained various waivers by the endorser, and an authorization to the transferee to vary the terms of the note in its discretion in dealing with the maker.
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. Here it may be noted that Universal recorded the contract in the Union County Register's Office a few days after its execution.
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." (Emphasis added) 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. See, 3 Williston on Contracts (3 d ed. Jaeger 1960) § 418, 418A. It has not been suggested that this assignment provision which equates "seller" with "assignee" creates such an intimate relationship between Universal and Unico as to impose Universal's delivery performance obligation on Unico as well as to transfer Universal's right to payment to Unico. Consequently the question is reserved for future consideration in an appropriate case under the Uniform Commercial Code. See N.J.S. 12A:2-210(4). In view of the comprehensive language employed, is such an assignment one for security only? Note New Jersey Study Comment 5, and Uniform Commercial Code Comment 5, to subsection 4. 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.
The second part of Exhibit "A" is entitled in large type, "Assignment and dealer's recommendation. This must be executed by the dealer." 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. It is signed by Murray Feldman, President of Universal.
The third part of Exhibit "A" is entitled "Guaranty." It is a printed form signed by Murray Feldman, as President, and Rhea M. Feldman, as Secretary, of Universal, and also as individuals guaranteeing payment of the sums due under Owen's contract to Unico.
As Exhibit "A" appears in the appendix, the Owen note referred to above is not now attached to the contract. The record is not clear as to just how it was attached originally, i.e., by a perforated line or otherwise; indication from the agreement itself is that it was attached, and was removed after execution and after or upon endorsement to Unico. In any event it was presented to and executed by Owen with the contract, and in view of the result we have reached in the case, whether it was attached or simply presented to Owen for signature with the contract is of no particular consequence.
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.
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 (L. 1961, c. 120), 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." N.J.S.A. 7:2-52. 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 ...