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Rudbart v. North Jersey District Water Supply Commission

Decided: April 27, 1992.


On certification to the Superior Court, Appellate Division, whose opinion is reported at 238 N.J. Super. 41 (1990).

For reversal; remandment -- Chief Justice Wilentz, Justices Handler and O'Hern, and Judge Petrella. For reversal; reinstatement -- Justice Clifford, and Judges Gaulkin and Keefe. Petrella, Judge, Concurring in remandment; Dissenting in part. Petrella, P.J.A.D. (temporarily assigned), Concurring in part and Dissenting in part. Gaulkin, P.J.A.D. (temporarily assigned), Concurring in part and Dissenting in part. Judge Keefe joins in this opinion. Clifford, J., Dissenting.

Per Curiam

We granted certification, 122 N.J. 137, 584 A.2d 210 (1990), primarily to consider the contention of First Fidelity Bank, N.A., New Jersey (Fidelity) that "in a published decision without precedent in the United States the Appellate Division had ruled that every investment security, whether a stock, bond, note or in some other form, is a contract of adhesion subjecting every term of the agreement to post hoc review for fairness." The Bank's petition for certification recited that "[n]ot only does this decision threaten to wreak havoc with the federally-regulated national securities market, but it would lead to the courts of this state being inundated with a group of law suits -- securities litigation -- that is among the most complex known to the bar."

We granted leave to the Attorney General of New Jersey to appear as amicus curiae because of his contention that

this is the only decision extending the application of the doctrine of adhesion contracts to the sophisticated and highly-regulated world of securities transactions.

The decision has the potential of opening to scrutiny by the courts the terms and conditions of notes and securities that have been sold to the public by governmental agencies throughout the State. The transfer of securities in the primary and secondary market hinges upon the certainty of the terms of such securities, and the assurance that those terms cannot be overridden by judicial

fiat. The broad implications of the decision by the Appellate Division could adversely affect on the sale of securities in this State.

The Attorney General suggested that the public debt financing to support the vast number of programs and projects necessary to the public health and welfare of the state would be endangered by the decision below. We agree that the doctrine of adhesion contracts should not be extended to regulated securities transactions. We now reverse the judgment of the Appellate Division, which was based on that court's holding that the subject securities constituted a contract of adhesion, but remand the matter to the Law Division for resolution of the remaining claims asserted by the plaintiffs.


These consolidated class actions were brought on behalf of holders of notes issued by defendant North Jersey District Water Supply Commission (Commission) to recover damages arising from an early redemption of the notes effected by newspaper notice. Plaintiffs' central claim was that notice by publication, although specifically provided for in the notes, was inadequate and unconscionable.


The Commission, a public corporation, operates and maintains a public water system serving northern New Jersey. See N.J.S.A. 58:5-1 to -58. By resolutions adopted April 25 and May 23, 1984, the Commission authorized the issuance of $75,000,000 in new project notes to provide interim financing for a portion of the cost of constructing a new water-supply facility and to pay certain outstanding obligations. See N.J.S.A. 58:5-44. The Commission and its underwriters, one of which was defendant Fidelity, negotiated the terms of the notes; Fidelity also was designated as the indenture trustee pursuant to N.J.S.A. 58:5-49 and as registrar/paying agent for the notes. The underwriters agreed to purchase the notes at the discounted

price of $73,800,000, intending to sell them on the secondary market at face value.

The project notes were issued on June 15, 1984. Issued in registered form, without coupons, in denominations of $5,000 or multiples thereof, the notes bore tax-free interest at the rate of 7 7/8 per annum payable on June 15th and December 15th. The notes fixed a June 15, 1987, maturity date, but, as set forth in both the Commission's authorizing resolutions and the Official Statement offering the issue to the public, were subject to earlier optional redemption:

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:

Redemption Period Redemption Price

(both dates inclusive) (percent of par value)

June 15, 1986 to December 14, 1986 101 %

December 15, 1986 and thereafter 100 1/2%

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 back of each of the issued notes bore similar language.

In the summer of 1985, the Commission decided to redeem the notes prior to maturity. In keeping with the procedures established in its 1984 resolutions, the Commission entered into an escrow deposit agreement with Fidelity, effective September 26, 1985, for the redemption of the notes on June 23, 1986. Among its other terms, the agreement provided for the Commission to deposit with Fidelity an escrow sum sufficient to pay the redemption price and interest until the redemption date, and for Fidelity to publish a notice of redemption in accordance with the note terms.

Although regular interest payments were mailed to registered noteholders on December 15, 1985, and June 15, 1986, neither those nor any other mailings informed the noteholders of the forthcoming early redemption. Fidelity did, however, provide the required notice by publication in The Star-Ledger, The New York Times, and The Wall Street Journal on May 23 and again on June 9, 1986. The June 3, 1986, issue of Moody's Municipal & Government Manual also contained the call notice.

As of December 15, 1986, the holders of approximately $10,000,000 of the notes still had not redeemed. A number of noteholders apparently made inquiries and complaints when they failed to receive their anticipated December 15, 1986, interest payments. Fidelity, at the Commission's request, mailed notice in early 1987 to those holders who had not yet redeemed, but declined the Commission's request to put the unredeemed funds in an interest-bearing account. The late-redeeming noteholders received the redemption price (101% of face value) and interest from June 15 to June 23, 1986, the date of redemption.

Plaintiffs filed separate actions in February and April 1987 on behalf of noteholders who allegedly had not learned of the redemption until after December 15, 1986. On various theories of negligence, conversion, breach of trust, constructive trust, and reformation, plaintiffs demanded that they be paid interest at the 7 7/8% rate from June 23, 1986, until the dates that they submitted their notes for redemption or other appropriate relief. The two actions were consolidated for trial.

At about the same time, a third plaintiff brought suit on behalf of late-redeeming noteholders in the United States District Court, Ellovich v. First Fidelity Bank, N.A., No. 87-650 (D.N.J. Mar. 2, 1988). That case asserted federal securities-law claims as well as state-law causes of action. The district court dismissed the federal claims on a finding that the offering statement did not fail to disclose any material facts with respect to the nature and consequences of the early-redemption

notice by publication. The court then dismissed the state-law claims for lack of subject matter jurisdiction, stating that "[t]he state court is the proper forum for the litigation of these causes of action." The Third Circuit Court of Appeals affirmed. Ellovich v. First Fidelity Bank, N.A., 862 F.2d 307 (1988).

The parties in the present actions then cross-moved for summary judgment on liability, based on a filed stipulation of facts. In a letter opinion, the Law Division held that "the notice provision clearly indicates that the newspaper publication method outlined would be the only type of notice given to the bond [sic] holders," and that "the failure to mail a notice to the plaintiffs when they could have, at the time they sent out interest checks," did not give rise to a cause of action. The Law Division granted summary judgment for defendants, finding that "the agreed upon notice by publication is binding on the plaintiffs and * * * such a method is not deficient as a matter of law." The court therefore entered judgment in favor of the Commission and Fidelity.

Before the Appellate Division, plaintiffs urged that the early-redemption notice by publication "was insufficient as a matter of law" and that the Commission and Fidelity had "converted [plaintiffs'] monies." They argued that the noteholders "had no power to negotiate with either the Commission or First Fidelity regarding the terms of the notes or the redemption provisions thereof," and that "[t]his is a classic example of a contract of adhesion." That was plaintiffs' first and entire reference to that theory of liability.

The Appellate Division adopted that theory. It reversed, holding that "a note or other security sold to the general investing public pursuant to standard form contractual provisions is a contract of adhesion"; that "[c]onsequently, 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"; and that "the failure * * * to give mail notice of the early redemption of the project notes was

unfair." Rudbart v. North Jersey Dist. Water Supply Comm'n, 238 N.J. Super. 41, 47, 568 A.2d 1213 (1990). The court reasoned that investment securities are generally "drafted by the issuer and presented to the purchaser on a take it or leave it basis," that the offering statements are "lengthy and difficult to understand," and that "members of the general investing public cannot reasonably be expected to understand the entire offering statement before deciding whether to purchase a particular security." Id. at 49, 568 A.2d 1213. Accordingly, courts should intervene "to afford protection to purchasers of securities from unconscionable contractual terms and other forms of overreaching by the issuers and their agents." Ibid. The Appellate Division went on to hold that "the notice by publication provided by defendants did not constitute fair notice of the early redemption," id. at 51, 568 A.2d 1213, and that "defendants did not show any legitimate business reason for failing to give notice by mail." Id. at 56, 568 A.2d 1213. The court thus reversed and remanded for the determinations of damages and their allocation as between the Commission and Fidelity. Id. at 57, 568 A.2d 1213.

We granted certification and the Commission's motion to supplement the record. We also granted leave to the State of New Jersey, the New Jersey Bankers Association, and the American Bankers Association to join as amici curiae.


Plaintiffs do not contend that the project notes are ambiguous, nor do they claim that the Commission or Fidelity committed fraud or violated federal or state securities laws. Ordinarily, then, contract law would make the terms of the notes fully binding on plaintiffs. That law, based on principles of freedom of contract, was well stated in Fivey v. Pennsylvania Railroad, 67 N.J.L. 627, 52 A. 472 (E. & A. 1902), in which the court enforced a release incorporated in a standard-form contract:

A party who enters into a contract in writing, without any fraud or imposition being practiced upon him, is conclusively presumed to understand and assent to its terms and legal effect. [ Id. at 632, 52 A. 472 (quoting Rice v. Dwight Mfg. Co., 56 Mass. (2 Cush.) 80 (1848)).]

See also Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 386, 161 A.2d 69 (1960) ("the basic tenet of freedom of competent parties to contract is a factor of importance"); Friedrich Kessler, Contracts of Adhesion -- Some Thoughts About Freedom of Contract, 43 Colum.L.Rev. 629, 630 (1943) (hereinafter Kessler) (traditional contract principle is that "once the objective manifestations of assent are present, the author is bound").

If an agreement is characterized as a "contract of adhesion" however, nonenforcement of its terms may be justified on other than such traditional grounds as fraud, duress, mistake, or illegality. See Todd D. Rakoff, Contracts of Adhesion: An Essay in Reconstruction, 96 Harv.L.Rev. 1174, 1190-92 (1983) (hereinafter Rakoff). Although the term "has acquired many significations," id. at 1176, the essential nature of a contract of adhesion is that it is presented on a take-it-or-leave-it basis, commonly in a standardized printed form, without opportunity for the "adhering" party to negotiate except perhaps on a few particulars. Id. at 1177; 3 Corbin on Contracts § 559C (Supp.1991); Kessler, supra, 43 Colum.L.Rev. at 632; Albert A. Ehrenzweig, Adhesion Contracts in the Conflict of Laws, 53 Colum.L.Rev. 1072, 1075 (1953); W. David Slawson, Standard Form Contracts and Democratic Control of Law-making Power, 84 Harv.L.Rev. 529, 530 (1971) (hereinafter Slawson). We have previously defined "contract of adhesion" in just those terms: "[a] contract where one party * * * must accept or reject the contract * * *." Vasquez v. Glassboro Serv. Ass'n, 83 N.J. 86, 104, 415 A.2d 1156 (1980). Such a contract "does not result from the consent of that party." Ibid.; see also Slawson, supra, 84 Harv.L.Rev. at 530 (standard form contracts "are not, under any reasonable test, the agreement of the consumer or business recipient to whom they are delivered"). The distinct body of law surrounding contracts of adhesion represents the legal system's effort to determine

whether and to what extent such nonconsensual terms will be enforced. Rakoff, supra, 96 Harv.L.Rev. at 1230.

The project notes involved here unquestionably fit our definition of contracts of adhesion. That is, they were presented to the public on standardized printed forms, on a take-it-or-leave-it basis without opportunity for purchasers to negotiate any of the terms.*fn1 But the observation that the notes fit the definition of contracts of adhesion is the beginning, not the end, of the inquiry: we must now determine as a matter of policy whether to enforce the unilaterally-fixed terms of the notes.

We have discussed those considerations in a number of earlier cases. The seminal case is Henningsen, supra, 32 N.J. 358, 161 A.2d 69, in which we invalidated an automobile manufacturer's standard-form disclaimer of its implied warranty of merchantability. In justifying that deviation from ordinary contract-law principles, we noted that a car is "a common and necessary adjunct of daily life," id. at 387, 161 A.2d 69, that the disclaimer form was used by the manufacturers of virtually all American passenger cars, id. at 390, 161 A.2d 69, that the "gross inequality of bargaining position * * * is thus apparent," id. at 391, 161 A.2d 69, and that the disclaimer represented "a studied effort to frustrate" the legislative grant of implied-warranty protection. Id. at 404, 161 A.2d 69.

In Ellsworth Dobbs, Inc. v. Johnson, 50 N.J. 528, 236 A.2d 843 (1967), we similarly invalidated a provision of a standardized real-estate-brokerage contract that obligated the seller to

pay a commission even if the buyer was financially unable or unwilling to complete the transaction. Relying on the "undue advantage" that arose from "monopolistic or practical control in the business transaction involved," id. at 553, 236 A.2d 843, we held that the offending contractual term would "thwart" the judicially-declared public policy of the State. Id. at 552, 555, 236 A.2d 843. Such a contractual provision accordingly is unenforceable "[w]henever there is substantial inequality of bargaining power, position or advantage between the broker and the other party involved." Id. at 555, 236 A.2d 843.

We applied similar principles in Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973), cert. denied, 415 U.S. 920, 94 S. Ct. 1421, 39 L. Ed. 2d 475 (1974), to invalidate the termination provision of an oil company's lease and dealer agreement. We described the oil company as "the dominant party," and found that its relationship with its dealer "lacks equality in the respective bargaining positions"; moreover, a dealer who has operated the station for a period of years "cannot afford to risk confrontation with the oil company." Id. at 408, 307 A.2d 598. Because the parties' "grossly disproportionate bargaining power" had produced a "grossly unfair" term that contravened "the extant public policy of this State," we did not enforce that term. Id. at 408-09, 307 A.2d 598.

We again explored contracts of adhesion in Vasquez, supra, 83 N.J. 86, 415 A.2d 1156, in which we denied enforcement of a provision in a migrant worker's contract permitting eviction of a worker immediately on termination of his employment. We noted that contracts should be enforced where "the parties are in positions of relative equality and * * * their consent is freely given." Id. at 101, 415 A.2d 1156. However, we found that the migrant farmworker was in a position "analogous to that of a consumer who must accept a standardized form contract to purchase needed goods and services." Id. at 103, 415 A.2d 1156. We also found that the eviction terms of the standard-form contract conflicted with the demonstrated policy of the New Jersey courts and Legislature "in providing legal protection

for migrant farmworkers." Id. at 99, 415 A.2d 1156. Because the contract "[did] not result from the [worker's] consent," we invalidated its "unconscionable" eviction provision. Id. at 104, 415 A.2d 1156; see also Kuzmiak v. Brookchester, Inc., 33 N.J. Super. 575, 111 A.2d 425 (App.Div.1955) (lease provision exculpating residential landlord from liability held contrary to public policy).

Thus, in determining whether to enforce the terms of a contract of adhesion, courts have looked not only to the take-it-or-leave-it nature or the standardized form of the document but also to the subject matter of the contract, the parties' relative bargaining positions, the degree of economic compulsion motivating the "adhering" party, and the public interests affected by the contract. Applying those ...

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