Court Opinion

ID: 9728697
Source: CourtListenerOpinion
Date Created: 2023-08-26 14:14:32.96602+00
Date Added: 2024-06-11T13:25:34.519065
License: Public Domain

PETRELLA, P.J.A.D.
(temporarily assigned), concurring in part and dissenting in part.
Because I am unable to agree fully with the Court’s conclusions, I concur in part IV of the opinion and vote for that result, but I dissent from parts I through III. In my view, the “contract” under which the registered bearer notes were purchased by individuals or institutions is one of adhesion. That the notice provisions of the contract are not necessarily “unconscionable” does not resolve the issue of whether those provisions, if patently unfair to registered note holders under the circumstances, warrant judicial intervention.
In simplest terms a contract of adhesion, looked at from the dominant party’s view, is merely one in which one party “adheres” to the terms which that party proposes, and does not *369allow any realistic change or changes in the contract. See 3 Corbin on Contracts § 559A through I (Supp.1991); Rakoff, Contracts of Adhesion: An Essay In Reconstruction, 96 Harv.L.Rev. 1174 (1983). The non-dominant party is left with little, if any, choice and must, if desiring to contract, adhere to the contract terms with but minimal, if any, bargaining ability. Black’s Law Dictionary (5th ed. 1979), defines the term “adhesion contract” as follows:
Standardized contract form offered to consumers of goods and services on essentially ‘take it or leave it’ basis without affording consumer realistic opportunity to bargain and under such conditions that consumer cannot obtain deshed product or services except by acquiescing in form contract. Distinctive feature of adhesion contract is that weaker party has no realistic choice as to its terms. * * * Not every such contract is unconscionable. [Id. at 38 (citations omitted).]
I disagree with the majority’s notion that it is significant that investors were not under any economic pressure to buy the project notes. Contrary to the majority opinion’s view, the fact that consumer necessities are not involved should not be determinative of the issue. Contracts of adhesion are not limited to contracts for necessities or policies of insurance unless the Legislature, or perhaps a court, so declares based on stated policy reasons. In my view, there is neither viable reason nor necessity to exclude securities from contract scrutiny. Hence, applying definitional terms, investment securities of the type involved in this case are contracts of adhesion and should be treated as such unless specifically provided otherwise by statute.
Investment securities of a New Jersey issuer, including the type involved in this case, are subject to Article 8 of the New Jersey Uniform Commercial Code (UCC) as in effect at the pertinent times involved in this litigation. N.J.S.A. 12A:8-1061 (as in effect prior to January 16, 1990), stated:
*370The validity of a security and the rights and duties of the issuer with respect to registration of transfer are governed by the law (including the conflict of law rules) of the jurisdiction of organization of the issuer.
The validity of the project notes issued on June 15, 1984, and the rights of the issuer regarding registration of transfer are not at issue here. The issue is the fairness or reasonableness of notice to a registered note holder solely by publication on May 23,1986, and June 9, 1986, in two newspapers published in New York City, New York, and one newspaper published in Newark, New Jersey.2 This faimess-of-notice concept is readily encompassed within the ambit of the “duties of the issuer with respect to registration of transfer,” which are determined as to this issuer (the Commission) and these project notes by the laws of this jurisdiction.
It is unnecessary to conclude that the notice by publication provision, despite any inherent unfairness or unreasonableness, is unconscionable. The organic law of this State and its statutes and case law apply, including the provisions of Article 1 of the UCC (generally applicable to all the UCC articles, except where stated to the contrary, see A. Abrams, Introductory Commentary to N.J.S.A. 12A:1-101 et seq.). See N.J.S.A. 12A: 1-102.
N.J.S.A. 12A:8-202 does not limit inquiry into the issue of the fairness of notice provisions, particularly in light of the perti*371nent language of N.J.S.A. 12A:8-106, which, as in effect at the pertinent times involved, applied New Jersey law to this issue of notes and the rights and duties of this issuer. N.J.S.A. 12A:8-202 makes various terms of the security applicable “[e]ven against a purchaser for value and without notice.” The thrust of that section is to establish the right of an issuer to incorporate terms by reference to other documents or legal authorities. It does not affect challenges to the validity of the issue or security. N.J.S.A. 12A:8-202 recognizes the applicability of a state “constitution, statute, ordinance, rule, regulation, order or the like to the extent that the terms so referred to do not conflict with the stated terms.” 3
Certainly, application of the law of fair notice does not conflict with the stated terms of these securities. Publication should not be construed as a stated term, nor as being to the exclusion of fair notice to registered note holders, nor as inconsistent with mailed notice. To expect that the absence of a reference to any of the cited authorities would mean other provisions of law have been ceded to the exclusive discretion of private law-making, i.e., contract law, does not seem logical. Indeed, this section of the UCC has been interpreted as dealing with rights against the issuer, UCC § 8-202 (official comment). Because I would not construe Article 8 of New Jersey’s UCC as limiting review of the fairness of the notice provisions for registered note holders whose names and addresses are readily ascertainable, I see no impediment to applying established principles of law to the notice.
*372It needs to be emphasized that this appeal does not involve the financial provisions of the notes, the validity or genuineness of the notes, negotiability, or defenses of the issuer.
There is no basis in this record, based apparently on a “Stipulation of Facts,”4 to conclude that the Appellate Division’s determination in this case of unfair notice to registered note holders would have any adverse effect on the issuance of municipal securities. Indeed, since the January 19, 1990, decision of the Appellate Division, nothing has been brought to the attention of this Court regarding any untoward consequence of that decision on the issuance of tax exempt securities in this state, other than some ipse dixit speculative arguments. It was essentially conceded at arguments before the Appellate Division and this Court that, as a practical matter, what happened in this case would not be repeated because written notice to all holders of registered securities is now the general rule, as well as the strong suggestion in “guidelines” (with virtually the force of regulations) of the Federal Securities and Exchange Commission. See 238 N.J.Super. at 52, 568 A.2d 1213. The record before the Appellate Division demonstrated a total lack of fair dealing with respect to the registered note holders as to the adequacy of the notice given. Van Gemert v. Boeing Co., 520 F.2d 1373 (2d Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 364, 46 L.Ed.2d 282 (1975) (involving convertible debentures), and its progeny, on which the Appellate Division relied (see 238 N.J.Super. at 53-56, 568 A.2d 1213), present persuasive authority.
*373The “Preliminary and Final Official Statement” dated May 16, 1984, on which defendants rely to support their claim that there was adequate notice and that plaintiffs individually, as well as all members of the class of registered note holders that they represent, should be bound by the contract, contains a provision somewhat inconsistent with defendants’ argument. It provides that the “Official Statement is not to be construed as a contract or an agreement between the Commission and the purchaser or holder of any Notes____”5
If the offering statement is not considered to be part of any contract, then all that the purchaser is left with is the “fine print on the back of each note.” 238 N.J.Super. at 44, 568 A.2d 1213. The record fails even to disclose whether plaintiffs received the offering statements before the purchase of the securities. See Id. at 49 n. 3, 568 A.2d 1213.
The Law Division judge appeared troubled at oral argument by the fact that First Fidelity Bank (First Fidelity) furnished its own customers with additional notice either by telephone or mail of the calling of the notes. The bank’s attorney argued *374then, and in a post-argument submission, that First Fidelity’s trust department was separate and distinct from its investment department, was housed in a separate building, and was merely an “indenture trustee” and not a “common-law trustee.” At that time, First Fidelity relied on a federal statute, presumably 15 U.S.C.A. § 77ooo(a)(1), and Meckel v. Continental Resources Co., 758 F.2d 811, 816 (2d Cir.1985). Counsel also argued that the bank did not have fiduciary responsibilities.6
Deposition extracts submitted to the Law Division judge after oral argument (partially in response to deposition references in plaintiffs’ brief) included portions of the testimony of Alex Williams, Executive Vice-president of First Fidelity, to the effect that at some point in 1986 the bank’s investment department gave written or oral notice of the call of the notes to its customers whether or not those customers had safe-keeping accounts with the bank, and that this was done prior to the June 23rd call date. He said that First Fidelity felt that it would be “good business” to inform its customers. The reasons given by Williams for First Fidelity’s actions were essentially that the bank wanted to sell new bonds to its customers, to continue good customer relations, and its concern that its customers might not receive notice. It is unclear how far in advance First Fidelity commenced notifying its customers of the June 23, 1984, call date. Williams also expressed the opinion, in response to the questions of the bank’s attorney, that First Fidelity maintained the list of purchasers of the project notes in connection with its underwriting activities for the issuance of the notes. When asked if he could have obtained that information from the trust department, he speculated that the trust department would have said “[i]t would *375have been a conflict of interest on their part. I don’t know what they would have said because we didn't ask for it.”7
Charles Hoos, Senior Vice-president of First Fidelity, testified that he was in charge of the corporate trust department and was aware of the fact that First Fidelity elected to give written notice of the redemption of the notes to customers of its investment department.
The resolution adopted by the Commission on April 25, 1984, defined “fiduciary” as “the Trustee or Paying Agent.” In section 504 of that resolution, as well as other sections, the trustee was charged with holding monies “in trust.” Similar language appeared in Article VI of that resolution, entitled “The Fiduciaries,” and also in a supplemental resolution dated May 23, 1984. Although the record does not contain the resolution appointing the bank as trustee or any document showing the trustee’s actual acceptance of that appointment, it is undisputed that the bank acted not only as indenture trustee, and accepted responsibility under the resolutions, but also acted as a managing underwriter, Paying Agent, Registrar, and eventually Escrow Agent, and was presumably paid for each activity. A September 1, 1985, Escrow Deposit Agreement between the Commission and First Fidelity entered into in connection with First Fidelity being named “in its capacity as trustee” as “Escrow Agent” regarding the defeasance of the lien of the notes is attached as “Exhibit G” to the stipulation of facts.
First Fidelity took the position before the Law Division, and in a September 9,1988, letter brief following the oral argument there, that nothing in the record indicated that the personal *376notifications given by the investment department of the bank were in any way a result of the bank’s position as trustee. It pointed to the deposition testimony of First Fidelity’s personnel that the investment department routinely telephones customers with respect to any major developments as to securities it sold. First Fidelity took the position that the deposition testimony demonstrated that a “Chinese wall” existed between the trust department and the investment department that was kept intact during this transaction. It also claimed a narrower scope of responsibility as an indenture trustee as referred to in Meckel v. Continental Resources, supra, 758 F.2d at 816 (duties limited to duties set forth in indenture).
However, it was not First Fidelity’s trust department that was appointed as trustee, but rather the bank. Indeed, if, as suggested in Meckel, an indenture trustee does not have a trustee’s duties of undivided loyalty and “is more like a stakeholder whose duties and obligations are exclusively defined by the terms of the indenture agent,” ibid., there is no need for the employment of a trust department and no need to hide behind one side of a “Chinese wall.” First Fidelity was not only one of the underwriters, but it was one of the managing underwriters of this issue. It was also the registrar/paying agent, escrow agent, and the indenture trustee for the project notes. Rudbart, supra, 238 N.J.Super. at 44, 568 A.2d 1213.
As trustee under the note issue (as well as in the other capacities) First Fidelity presumably received significant fees for its responsibilities, which in part included protecting the rights of note holders. In that capacity, for which it was paid, First Fidelity now says it had no obligation to notify any note holders in any fashion other than by the method of publication as set forth in the Commission’s resolution. On the other hand, First Fidelity argues that in its capacity as a bank, its investment department, which also receives fees for its services, including protection of customers, apparently undertook to give special notice to its own customers past and potential, with no obligation to do so. See Rudbart, supra, 238 N.J.Super. at 51 *377n. 4, 568 A.2d 1213. Thus, First Fidelity argues that it can demand the benefits of both worlds, but without any additional obligations, particularly toward those who did not purchase the notes through it.
Although First Fidelity has a trust department, an investment department, and other departments or functions, it was First Fidelity that was appointed trustee, not one of its departments. It had fiduciary responsibilities under the terms of the resolutions, and those were not negated by federal law or a lesser standard of trusteeship.8 The bank is charged, or should be charged here, with knowledge of all of the actions of all its departments and subdivisions, whether or not one department had actual contact with another. The fact is that First Fidelity elected to notify selectively its own customers. It acted in a manner that exhibited at best a lack of fair dealing and at worst, bad faith. It should not be allowed to assume duties with one hand and to reject them with the other. This case is a more compelling one to apply the fairness doctrine because First Fidelity knew about the situation with respect to note holders, but acted for only its own customers. It acted in multiple capacities and should not be allowed to claim a judicially sanctioned split personality and hide behind an artificially created “Chinese wall” that it alternatively erects or dissolves based on whether it claims a trust duty, a stakeholder’s duty, or some other function. It was First Fidelity, the entity, that assumed multiple positions and was appointed with the responsibility of indenture trustee, however defined. The existence of separate divisions for business purposes does not allow it to act in a disparate manner when it knows the names and addresses of registered note holders who are both customers and non-*378customers. See Buonviaggio v. Hillsborough Township Committee, 122 N.J. 5, 15, 583 A.2d 739. (1991).
The majority opinion chooses to ignore the fact that in the related case of Ellovich v. First Fidelity Bank, N.A., N.J., No. 87-650 (D.N.J.1988), it was established that prior to issuance of the offering statement, First Fidelity’s counsel suggested that notice of early redemption be given by mail rather than publication, based on his understanding that that was the usual form of notice to holders of registered securities. Rudbart, supra, 238 N.J.Super. at 53 n. 5, 568 A.2d 1213. Moreover, the “Stipulation of Facts” submitted in connection with the summary judgment motions stated: “Prior to the publication of the notices, Julie Saloveitch Miller, Administrator of the bond offering at First Fidelity, discussed the notice to be given with Gerald Volpe, Comptroller of the Commission.” The Commission insisted on the publication notice. Ibid. Nonetheless, nothing requires that the published notice had to be the exclusive method of notice. There is also a reference in the argument before the Law Division on September 2, 1988, and in submitted deposition testimony, to a discussion between the representatives of the Bank and the Commission about the type of notice to be given just before the time of notice by publication. To compound the problem, First Fidelity refused to deposit in an interest-bearing account the sums due the note holders who had not sought timely redemption even after the Commission had requested that action after the redemption date.9
That a public entity may have participated in what resulted in unfair notice should not be a basis to excuse such action merely because rate payers may be affected. When dealing with the public, “government must ‘turn square corners’ rather than exploit litigational or bargaining advantages that might otherwise be available to private citizens.” W. V. Pangborne & Co. *379v. New Jersey Dep’t of Transp., 116 N.J. 543, 561, 562 A.2d 222 (1989). The government must act fairly and "with compunction and integrity.” Id. at 562, 562 A.2d 222 (quoting F.M.C. Stores Co. v. Borough of Morris Plains, 100 N.J. 418, 427, 495 A.2d 1313 (1985)).
The Appellate Division decision is essentially limited to the notice provisions under the unique circumstances of this case. It does not affect the financial terms of the project notes in any way. Moreover, with that limitation highlighted, it is clear that the Appellate Division holding regarding the lack of fairness of limiting the notice provisions of the notes to publication in unspecified (in the prospectus or note) newspapers circulating in New York City and Newark10 and has nothing to do with:
(1) the financial terms of the notes;
(2) the sale and issuance of the notes;
(3) the risk of investment [That hardly includes the risk that the issuer would forget about the registered owner];
(4) the price or pricing of the security;
(5) the operation of the issuer or the underwriters; or
(6) damage or loss to the issuer or the bank [the cost of any written notice to individual registered bond holders would be de minimis and could even be deducted from interest after the redemption date].
In actuality there is no real burden placed on the securities industry by a requirement that fair notice be given to note holders in the issuance of registered securities. What occurred here was an atypical situation. The limited record before us indicates that with respect to all other issues, and particularly future tax exempt issues, individual notice to the registered security holders is the general practice, encouraged and in effect required by the SEC.
Simply stated, fair dealing should be required. Cf. New Brunswick Savings Bank v. Markouski, 123 N.J. 402, 423-426, *380587 A.2d 1265 (1991) (actual notice of an execution sale must be provided to judgment creditors whose names and addresses are reasonably ascertainable). Onderdonk v. Presbyterian Homes of N.J., 85 N.J. 171, 182, 425 A.2d 1057 (1981) (implied conditions include fairness and justice); Bak-a-Lum Corporation of America v. Alcoa Building Products, Inc., 69 N.J. 123, 129-130, 351 A.2d 349 (1976) (implied covenant of good faith and fair dealing in every contract).
Although I differ with some of the reasoning in the Court’s opinion, I concur in the result reached in Part IV. However, my preference would be to affirm substantially for the reasons expressed by the Appellate Division as reported at 238 N.J.Super. 41, 568 A.2d 1213 (App.Div.1990).

 The note holders here are governed by the provisions of that section in effect prior to a 1990 amendment. That section was amended by L. 1989, c. 348, § 7, effective January 16, 1990, to read:
*370The law (including the conflict of laws rules) of the jurisdiction of organization of the issuer governs the validity of a security, the effectiveness of registration by the issuer, and the rights and duties of the issuer with respect to:
(a) Registration of transfer of a certificated security;
(b) Registration of transfer, pledge, or release of an uncertificated security; and
(c) Sending of statements of uncertificated securities.
This appeal does not involve the validity of the security. It involves the effectiveness of registration by the issuer as well as the rights and duties of the issuer with respect to transfer of a certificated security.

 The call notice was also published in Moody's Municipal & Government Manual on June 3, 1986.

 The legal opinion attached to the offering statement recites, among other things, that the "notes have been duly and validly authorized and issued in accordance with the Constitution, the Act and the applicable statutes of the State of New Jersey and in accordance with the Resolution; ...” It goes on to state: ‘The enforceability of rights or remedies with respect to the Notes and with respect to the Contracts may be limited, however, by bankruptcy, insolvency, moratorium or other laws heretofore or hereby enacted affecting creditors’ rights or remedies; ...” That is an acknowledgement that the notes are subject to law, including case law.

 The so-called stipulation submitted in plaintiffs’ appendix bears no signatures and does not even contain a signature block for the Commission. Perhaps that was because the Commission did not participate in the proceedings before the trial court until a default was belatedly vacated before argument on the cross-motions for summary judgment. The Commission did not participate in the appeal before the Appellate Division. See 238 N.J.Super. at 47 n. 2, 568 A.2d 1213. The Commission’s present attorneys were not involved in the earlier proceedings. At this Court’s request, the attorneys for First Fidelity submitted a copy of a stipulation bearing the signatures of only plaintiffs’ attorneys. In any event, no party disputes the stipulation.

 This official statement contains, among other things, the following disclaimers:
The information and the expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement, nor any sale made hereunder, shall under any circumstances create an implication that there has been no change in the affairs of the Commission, the Bank or the WSP Contracting Municipalities since the date hereof.

********

This Official Statement is not to be construed as a contract or an agreement between the Commission and the purchaser or holder of any Notes. Any statements made in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended merely as opinion and not as representations of fact. The information and the expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Commission or the Bank since the date hereof.

 This argument may have been raised because of the existence of 12 C.F.R. § 9.10 and N.J.S.A. 17:9A-35(D), which seem to require investment of unclaimed fiduciary funds. These authorities were not brought to the court's attention by any party, and might well impact on the bank’s obligations and duties here.

 Williams’ statement is premised on principles of fiduciary law that First Fidelity at other points disavows, despite its designation as "trustee," the fact that under the resolutions it was holding funds "in trust,” and the heading "The Fiduciaries" in the Commission’s resolution of April 25, 1984, which First Fidelity apparently accepted. Moreover, the September 1,1985, Escrow Deposit Agreement refers to the bank "in its capacity as trustee."

 This is aside from obligations imposed by law. 12 C.F.R. § 9.10 and N.J.S.A. 17:9A-35(D) appear to assume that unclaimed fiduciary funds are not to be held uninvested longer than reasonably necessary for proper account management. See supra at 374 n. 6, 605 A.2d at 696 n. 6.

 The bank apparently settled with some "good customers.

 I doubt whether any court would have difficulty with the adequacy or fairness issue here if notice to registered note holders were to be solely in newspapers published and circulating, for instance, in Nome, Alaska and/or a designated city in any non-contiguous sister state of the United States.