On appeal from Superior Court of New Jersey, Law Division, Passaic County.
J.h. Coleman, Muir and Skillman. The opinion of the court was delivered by Skillman, J.A.D.
Defendant North Jersey District Water Supply Commission (the Commission) is a public body which operates and maintains a public water system that serves northern New Jersey. To provide interim financing for a portion of the cost of constructing a new water supply facility and to pay certain outstanding obligations, the Commission authorized the issuance of $75,000,000 in new project notes bearing interest at a rate of 7 7/8% per annum. Defendant First Fidelity Bank, N.A. (Fidelity)*fn1 was one of the Commission's underwriters as well as the indenture trustee and the registrar/paying agent for the notes. Plaintiffs were purchasers of the notes.
The Commission issued the project notes on or about June 15, 1984. Since the notes were in registered form, Fidelity had the address of each noteholder, to which it mailed interest payments semi-annually on June 15 and December 15. The notes had a stated term of three years but could be called for early redemption.
At some point each noteholder apparently received a copy of the Commission's offering statement, which set forth the terms of the notes. This document included a section which stated:
The Notes are subject to redemption prior to maturity as a whole at the option of the Commission on 30 days published notice in a newspaper or newspapers of general circulation in the City of Newark, New Jersey and in the City of New York, New York on the dates and at the prices below:
If on the date fixed for redemption sufficient monies are available to the Trustee to pay the redemption price plus interest accrued to the date of redemption, the Notes shall cease to bear interest and shall not be deemed to be outstanding from such date.
The fine print on the back of each note included similar language.
In the summer of 1985 the Commission decided to exercise its option to redeem the notes prior to maturity. Consequently, it entered into an "escrow deposit agreement" with Fidelity, effective September 26, 1985, pursuant to which it fixed June 23, 1986 as the date of redemption.
Subsequent to the execution of this agreement, Fidelity sent two semi-annual interest payments by mail to the addresses previously designated by the noteholders. Neither mailing mentioned the scheduled early redemption of the notes. Moreover, neither Fidelity nor the Commission directly communicated in any other way with the plaintiffs regarding the redemption. Rather, the only notice of the early redemption given to the plaintiffs was by publication in several New York area newspapers and in Moody's Municipal and Government Manual.
As of December 15, 1986, nearly six months after the redemption date, the holders of approximately $10 million worth of the $75 million in project notes originally issued still had not redeemed their notes. After receiving telephone calls and written complaints from noteholders regarding their failure to receive interest payments on December 15, 1986, Fidelity, at the Commission's behest, provided mail notice in January of 1987 to the noteholders who had not yet redeemed. Most of these noteholders then redeemed their notes. However, they were only paid the redemption price (101% of the face value of the notes) plus interest from June 15, 1986 to June 23, 1986. The Commission and Fidelity refused to pay any interest for the period subsequent to June 23, 1986.
Plaintiffs Theodore Rudbart, et al and Madeline Okin filed separate class actions in Passaic and Bergen counties against the Commission and Fidelity, alleging that the notice of the early redemption had been inadequate and seeking, among other things, interest from June 23, 1986 to the date of redemption. The trial court certified the Passaic County complaint as a class action and subsequently the complaints were consolidated in Passaic County.
Plaintiffs and Fidelity filed cross-motions for summary judgment. Thereafter, these parties entered into a stipulation of facts on the liability aspects of the case, reserving the right to adduce additional evidence on the issue of damages should that become necessary. The trial court heard oral argument on September 2, 1988 and issued a written opinion on September 14, 1988 directing that summary judgment be granted in favor of the defendants. The trial court found that the offering statement and notes "clearly indicated" that "the only notice of redemption" the noteholders would receive would be by newspaper publication and concluded that this "agreed upon notice" was "binding on the plaintiffs and . . . not deficient as a matter of law."
While this matter was pending before the trial court, another noteholder who failed to see published notice of the redemption filed a class action in the United States District Court for New Jersey, Ellovich v. First Fidelity Bank, N.A., New Jersey, et al., Docket No. 87-650. In a written opinion filed March 2, 1988, the district court found that the plaintiff in that action had not presented any evidence that Fidelity failed to disclose a material fact in connection with the offering and consequently granted Fidelity's motion for summary judgment with respect to plaintiff's Rule 10b-5 claim, 17 C.F.R. § 240.10b-5 (1989). However, the federal court declined to exercise pendent jurisdiction with respect to state law claims. Consequently, the court expressly noted that "its ruling on plaintiff's federal claim provides no indication as to the viability of plaintiff's state law claims. The state court is the proper forum for the litigation of these causes of action." The Third Circuit Court of Appeals subsequently affirmed the dismissal of this federal complaint.
Plaintiffs appeal from the dismissal of their complaints, arguing, among other things, that the project notes are "a classic example of a contract of adhesion" and that "it would be unjust to allow either the Commission or First Fidelity to benefit as a result of their failure to provide adequate notice of the redemption
to the Note holders." Fidelity argues that the terms of an investment contract are not subject to invalidation on the grounds of unconscionability or unfairness.*fn2 In the alternative, Fidelity argues that published notice in the newspaper constituted adequate notice to plaintiffs of the early redemption of their notes.
We conclude that a note or other security sold to the general investing public pursuant to standard form contractual provisions is a contract of adhesion. Consequently, if the security contains an unfair provision or the issuer fails to deal fairly with the investors, the issuer and its agents may be liable for any resulting damages. We also conclude that the failure of the Commission and Fidelity to give mail notice of the early redemption of the project notes was ...