Circle v. Jim Walter Homes, Inc., MID-STATE
| Decision Date | 07 July 1976 |
| Docket Number | MID-STATE,Nos. 75-1354,75-1355,s. 75-1354 |
| Citation | 535 F.2d 583,19 U.C.C.Rep. 158 |
| Parties | 19 UCC Rep.Serv. 158 Roy M. CIRCLE and Wanda J. Circle, on behalf of themselves and others similarly situated, Plaintiffs-Appellants, v. JIM WALTER HOMES, INC., a corporation, et al., Defendants-Appellees. Rayfield SMILEY and Evelyn C. Smiley, on behalf of themselves and others similarly situated, Plaintiffs-Appellants, v.HOMES, INC., a corporation, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
James M. Little and John N. Goodman of Conner, Little & Conner, Oklahoma City, Okl., for plaintiffs-appellants.
Lawrence A. G. Johnson of Farmer, Woolsey, Flippo & Bailey, Inc., Tulsa, Okl., for defendants-appellees.
Before SETH, BARRETT and DOYLE, Circuit Judges.
In each of the above cases reversal is sought of a judgment of dismissal as well as judgments refusing to certify either of the cases as class actions.
In each of the actions the plaintiffs allege that they purchased a home from Jim Walter Homes, Inc., et al. 1 Plaintiffs contracted to pay in installments the cash price and finance charge, and according to their further allegations executed promissory notes and mortgages running to the defendants. They also allege that the notes were negotiable within the meaning of the Uniform Commercial Code, 12A O.S.A. Section 3-104(1) (1961). Oklahoma has in addition adopted the Uniform Consumer Credit Code (UCCC), which makes it unlawful for a seller to "take a negotiable instrument other than a check as evidence of the obligation of the buyer" in a consumer credit transaction. 14A O.S.A. Section 2-403. Plaintiffs claim that they are entitled to relief under the provision of the UCCC Section 5-202, 14A O.S.A. Section 5-202, which provides that
(1) If a creditor has violated the provisions of this Act applying to certain negotiable instruments (Section 2-403) * * * the debtor is not obligated to pay the credit service charge or loan finance charge and has a right to recover from the person violating this Act or from an assignee of that person's rights who undertakes direct collection of payments or enforcement of rights arising from the debt a penalty in any amount determined by the court not in excess of three times the amount of the credit service charge or loan finance charge.
Still further of the plaintiffs' allegations is that all of the persons purchasing homes from the defendant beginning July 1, 1969, the effective date of the UCCC, executed a form negotiable note identical to that executed by the plaintiffs, the only differences being the dates, amounts and names. It is alleged that 358 persons signed such notes. Use of that number would result in a total refundable finance charge of $1.5 million and a total penalty of.$4.5 million. The defendants contend that the number is limited to 208. The average finance charge for each of the potential class members would be $4,080. Based upon the defendant's estimate of the class size, the maximum finance charge to be refunded would be approximately $850,000, the maximum penalty approximately.$2.5 million.
This cause has been before the court previously. In this court's opinion rendered February 5, 1975, the judgment of the district court dismissing the claims was reversed. Also, the judgment of the court denying class action status was reversed and remanded for further proceedings due to the fact that the judge had failed to set forth the reasons for its denial of class action status. Notwithstanding the remand, the cause was, as noted above, again dismissed and the class action status was again denied, and so once again we must address the case, considering two principal issues. These are:
First, whether the notes are negotiable within the meaning of the UCC and taking into account that the UCCC makes it unlawful for a seller to accept a negotiable instrument other than a check as evidence of the obligation of the buyer.
Second, whether the court erred in refusing to certify this as a class action.
The notes in question are on their face negotiable meeting all requirements of the UCC, 12A O.S.A. Section 3-104. They contain an unconditional promise to pay a sum certain at a specific time to the order of defendant. Defendant's argument, with which the trial court agreed, is that the notes do not in fact promise to pay a sum certain because the debts incurred by plaintiffs in the purchase of homes are subject to a right of prepayment and rebate of unearned interest computed by the Rule of 78's. This arises from the Uniform Consumer Credit Code (UCCC), 14A O.S.A. Sections 2-209 and 2-210. Existence of such a provision is not apparent from the face of the note nor does the note disclose the fact of an underlying consumer transaction.
The trial court concluded the uncertainty of amount on the basis that should the note be paid in advance of the due date the maker would be entitled to a rebate of the unearned finance charge (which was in reality interest). Since this could not be calculated from the face of the note and required reference to the building contract in order to ascertain the amount of the cash price together with down payment so as to know the amount financed, it was reasoned that this failure to provide a formula on the face of the note rendered the instrument non-negotiable. Thus, the contention of defendant reduces itself to the issue whether the statute providing for the rebate of unearned interest itself creates uncertainty as to amount of the note within the meaning of the UCC or whether the statute (14A O.S.A. Section 2-403) prohibiting use of a promissory note itself constitutes a real defense even as to a holder in due course and thus expresses a policy which in effect renders the instrument a nullity as negotiable paper.
Our fundamental disagreement with the court's conclusion stems from the fact that no reason exists for holding that the note is non-negotiable and unenforceable in the hands of a holder in due course.
We determine this by analyzing the relevant consumer and commercial statutes, the first of which is 12A O.S.A. Section 3-305(2)(a), (b) (UCC). This section states in effect that a holder in due course takes the instrument free from "all claims to it on the part of any person and all defenses of any party to the instrument with whom the holder has not dealt." Exceptions are what might be termed real defenses such as infancy, incapacity, duress or illegality "as renders the obligation of the party a nullity." The question then becomes: Does the above mentioned provision of the UCCC prohibiting use of negotiable instruments in consumer transactions render the obligation of the party (maker) a nullity, for it is only the illegality of this extreme nature which is capable of bringing about the conclusion that the instrument is unenforceable even in the hands of a holder in due course. Though this is not exactly equal to rendering the instrument non-negotiable, it is arguably similar to it.
Turning now to the prohibition against use of negotiable instruments in consumer transactions, Section 2-403 of the UCCC provides:
In a consumer credit sale or consumer lease, other than a sale or lease primarily for an agricultural purpose, the seller or lessor may not take a negotiable instrument other than a check as evidence of the obligation of the buyer or lessee. A holder is not in good faith if he takes a negotiable instrument with notice that it is issued in violation of this section. A holder in due course is not subject to the liabilities set forth in the provisions on the effect of violations on rights of parties (Section 5-202) and the provisions on civil actions by Administrator (Section 6-113).
It is clear from a reading of this section that it only prohibits use of the negotiable instrument it does not undertake to render the instrument a nullity so that it will be the subject of a real defense, nor does it outlaw such an instrument. Instead it displays plainly an intent not to render the note non-negotiable. This is apparent from the statement contained in it that a holder is not a holder in good faith if he takes a negotiable instrument with notice that it is issued in violation of the statute, and so this is the sanction as imposed in connection with the use of negotiable instruments in a consumer transaction. It would follow that if a holder took without notice that it is issued in violation of the statute, he would be a holder in due course and would take free of equities, including that which would arise from its having been issued in violation of the UCCC. An added evidence that the framers consider the note negotiable is to be inferred from the statement that a holder in due course is not subject to other statutory liabilities resulting from violations described in other sections. Therefore, the legislature did not intend that the use of a negotiable instrument in a consumer transaction serves to render the instrument a nullity or to destroy its negotiability. Its recognition that a holder in due course can cut off equities, including violation of the prohibition against the use of negotiable instruments, manifests an intent that their negotiability is not impaired.
Finally, the sole sanction flowing from violation of the consumer act by use of a negotiable instrument is that the debtor is not obligated to pay the credit service charge or loan finance charge and has a right to recover from the violator in not only the amount of the finance charge, but possibly three times the amount of the finance charge in addition, 14A O.S.A. Section 5-202(1). On refusal to refund the finance charge within a reasonable time, the court is empowered to impose a penalty not...
To continue reading
Request your trial
-
Therapy v. the Taranto Group Inc.
...hardship that a class action judgment would impose on the defendant as grounds for decertifying a class. In Circle v. Jim Walter Homes, Inc., 535 F.2d 583, 589 (10th Cir.1976), the Tenth Circuit Court of Appeals reversed the denial of class certification that was based in part on the econom......
-
First State Bank at Gallup v. Clark
...Co., W.Va., 207 S.E.2d 897 (1974); Walls v. Morris Chevrolet, Inc., 515 P.2d 1405 (Okl.Ct.App. 1973); see Circle v. Jim Walter Homes, Inc., 535 F.2d 583, 585 & 588 (10th Cir. 1976). As Hart & Willier, 2 Bender's U.C.C. Service, Commercial Paper, § 2.03(1) points out in its text and in footn......
-
Hinkle v. Rock Springs Nat. Bank
...that an instrument so used remains a valid promissory note, and under most circumstances it remains negotiable. Roy M. Circle v. Jim Walter Homes, 535 F.2d 583 (10th Cir.). Here the note was taken by Adams, and it was payable to the bank which obviously knew the origin of the instrument. No......
-
Rex v. Owens ex rel. State of Okl.
...Patrolmen's League v. Duck, 503 F.2d 294 (6th Cir. 1974) (no more than 35 minority group members identified); Circle v. Jim Walter Homes, Inc., 535 F.2d 583 (10th Cir. 1976) (358 persons who executed challenged negotiable notes); McCown v. Heidler, 527 F.2d 204 (10th Cir. 1975) (262 lot pur......
-
Okla. Stat. tit. 12A, § 3-302 Holder In Due Course
...A violation of those sections can result in severe monetary sanctions. See 14A O.S. 5-202(1); Circle v. Jim Walter Homes, Inc., 535 F.2d 583 (10th Cir. 1976), on remand, 470 F.Supp. 39 (W.D. Okla. 1979), aff'd, 654 F.2d 688 (10th Cir. 1981), Bill Brown Motors, Inc. v. Crane, 589 P.2d 708 (O......
-
Okla. Stat. tit. 12A, § 3-104 Negotiable Instrument
...see sub section 3-106(b)(i) ); Walls v. Morris Chevrolet, Inc., 515 P.2d 1405 (Okra. Ct. App. 1973); and Circle v. Jim Walter Homes, Inc., 535 F.2d 583 (lOth Cir. 1976), on remand, 470 F.Supp. 39 (W.D. Okla. 1979), aff'd, 654 F.2d 688 (lOth Cir....