One Valley Bank of Oak Hill, Inc. v. Bolen

Decision Date16 December 1992
Docket NumberNo. 21266,21266
Citation425 S.E.2d 829,188 W.Va. 687
CourtWest Virginia Supreme Court
PartiesONE VALLEY BANK OF OAK HILL, INC., a Corporation, Plaintiff, v. Robert T. BOLEN, Sr. and Judith G. Bolen, His Wife, Defendants.

Syllabus by the Court

1. When a note is created as a result of a consumer transaction, an assignee of such a note takes the note subject to all claims and defenses, regardless of whether the assignee is a holder in due course. W.Va.Code 46A-2-102 [1990].

2. W.Va.Code, 46A-5-101 [1974], outlines the types of additional damages that may be recovered for various violations of Chapter 46A, and specifies illegal, fraudulent or unconscionable conduct.

3. W.Va.Code, 46A-2-102(5) [1974], allows the consumer to recover an amount not to exceed the amount owing to the assignee at the time of such assignment. Its exception for an additional amount because of fraud is controlled by W.Va.Code, 46A-5-101 (1974), and W.Va.Code, 46A-2-102(5) (1974).

4. Under W.Va.Code, 46A-5-101 [1974], the additional damages for fraud or unconscionable conduct are limited to actual damages and, if the court so determines, a penalty of not less than one hundred nor more than one thousand dollars. Consequently, punitive damages are not available under the fraud or unconscionable conduct provisions of W.Va.Code, 46A-2-121 [1974].

Dana F. Eddy, Charleston, James C. Blankenship, III, Fayetteville, and Vincent P. Cardi, Morgantown, for plaintiff.

D. Clinton Gallaher, IV, Fayetteville, for defendants.

NEELY, Justice:

The Circuit Court of Fayette County asks us to determine to what extent an assignee of a note is liable to the payor of that note for a fraud committed by the assignor (original payee). Specifically addressed in this certified question is the way the West Virginia Consumer Credit and Protection Act affects the general holder in due course rules. At issue is the ready availability of credit to consumers.

I.

On 12 September 1988, Robert Bolen, Sr., and Judith Bolen, defendants/counterclaimants in this action, purchased a used 1988 Cadillac DeVille from Derald Rollyson, Inc. for $22,900. The Bolens made a cash down payment of $2,889.77, received $1,583.24 as trade-in for their Cadillac El Dorado, and financed the rest of the purchase price. The Bolens promised to pay 60 monthly installments of $486.36, which is the remainder of the purchase price financed at an annual interest rate of 10.9 percent.

Allegedly, the DeVille was described by the salesman as a "factory official" car. On 16 May 1989, the Bolens assert that they discovered that, in fact, the car had been owned by Hertz and used as a rental car in Florida from February through June of 1988. The Bolens claim that this was a material difference and they would not have bought the car had they known it had been a rental car.

On the same day the car was sold, Derald Rollyson, Inc., sold the Bolen's credit obligation to One Valley Bank of Oak Hill (Bank). Bank received Rollyson's formal written assignment of its rights, title and interest under that credit agreement. When the Bolens discovered the alleged fraud, they stopped making payments on the note. Bank then brought suit to repossess the DeVille and to establish what amount remained on the obligation after the repossession. The Bolens countersued Bank, asking for the damages they suffered as a result of the alleged fraud on the part of the Bank.

To help resolve this claim, the Circuit Court of Fayette County certified the following questions:

1. Does West Virginia Code 46A-2-102 limit the amount of compensatory or punitive damages that a consumer may recover from an assignee that holds an instrument, contract or writing that was induced by fraud on the part of the seller occurring prior to July 1, 1990? [emphasis original]

2. If the provisions of West Virginia Code 46A-2-102 allow a consumer to recover damages from an assignee that exceed the amounts paid by that consumer with respect to the consumers credit obligation, are these provisions:

a. Preempted by the FTC Notice of Claims and Defenses Regulation (16 C.F.R. 433.2); or

b. In violation of the West Virginia or United States Constitutions.

II.

Credit, for better or worse, is the lifeblood of our consumer economy. The need to make credit more readily available was a driving force behind the creation of the Uniform Commercial Code 1 as well as the great strides made earlier by Lord Mansfield at the end of the 18th century and transplanted wholesale into our law in the 19th century. The ability of negotiable commercial paper to flow nationwide without regard to local conditions allows all business, no matter how small or remote, access to nationwide capital markets. The main reason for this free flow of commercial paper is the "holder in due course" provisions contained in W.Va.Code 46-3-305 [1963] that permit a purchaser who, in good faith, purchases a negotiable instrument and gives value for it without notice of any defense against it or claim to the instrument, to take the instrument free from virtually all defenses. 2

Although this rule worked well to increase available credit, it also created some harsh results. Consumers, it was discovered, lacked adequate bargaining power to protect themselves from slick operators in the retail business. For example, a woman might buy a television set on credit from Slick Willie's Appliance Shoppe and sign a promissory note for the balance. (If she had cash she'd be dealing with Sears!) After the woman gets home and plugs in the television, the set blows up. Furious, she may bring the television set back to Slick Willie's the next day only to find that Willie has assigned her note to the Last National Bank and headed for Rio. The bank, as holder of the note, could still demand payment on the note, and the woman would be obligated to pay. Meanwhile, Slick Willie has gone underground and cannot be found. Now the consumer has no television, no useful cause of action, but the consumer is still liable to pay for the television.

Indeed, this very scenario occurred frequently in door-to-door sales transactions, most notoriously the sale of storm windows, storm doors and aluminum siding. Thus, by the early 1970's, the Supreme Court of New Jersey began to look behind the claim of holder in due course status to determine whether a bank was actually part of the scheme. In General Investment Corp. v. Angelini, 58 N.J. 396, 278 A.2d 193 (1971), the New Jersey court found that the "good faith" requirement to be a holder in due course has a significant meaning:

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 would follow, therefore, that the more the holder knows about the underlying transaction, and particularly the more he controls or participates or becomes involved in it, the less he fits the role of a good faith purchaser for value; the closer his realtionship [sic] to the underlying agreement which is the source of the note, the less need there is for giving him the tension-free rights considered necessary in a fast-moving, credit-extending commercial world. (quoting Unico v. Owen, 50 N.J. 101, 109 (1967)) [Emphasis added]

General Investment, 58 N.J. at 403, 278 A.2d at 196. As the New Jersey Supreme Court was taking this approach toward banks that tried to hide behind the holder in due course doctrine, the court noted that the New Jersey Legislature had taken steps to prevent the continuation of this problem:

The Legislature settled this problem for the future by L.1969, c. 237, § 2, which provides:

"No home repair contract shall require or entail the execution of any note unless such note shall have printed the words 'CONSUMER NOTE' in 10-point bold type or larger on the face thereof. Such a note with the words 'CONSUMER NOTE' printed thereon shall be subject to the terms and conditions of the home repair contract and shall not be a negotiable instrument within the meaning of chapter 3 (Commercial Paper) of the Uniform Commercial Code, N.J.S. 12A:3-101 et seq." N.J.S.A. 17:16C-64.2

New Jersey stripped all notes based on underlying home repair contracts of their holder in due course status in order to protect consumers from this unfair situation. Similarly, the West Virginia Legislature, looking to mitigate the harshness of the holder in due course rules on consumers, enacted the West Virginia Consumer Credit and Protection Act. W.Va.Code Chap. 46A [1974]. See Clendenin Lumber and Supply Com. v. Carpenter, 172 W.Va. 375, 379-380, 305 S.E.2d 332, 336-337 (1983).

Part of the West Virginia Legislature's plan for mitigating the harsh effects of the UCC also included stripping assignees of consumer commercial paper of most of the benefits of being holders in due course, although the West Virginia statute was far more comprehensive than the early New Jersey statute quoted above. W.Va.Code 46A-2-102(5) [1974] provided:

The following provisions shall be applicable to instruments, contracts or other writings, other than negotiable instruments, evidencing an obligation arising from a consumer credit sale or consumer lease, other than a sale or lease primarily for an agricultural purpose ...: Notwithstanding any term or agreement to the contrary or the provisions of article two [§ 46-2-101 et seq.], chapter forty-six of this code or section two hundred six [§ 46-9-206], article nine, of said chapter forty-six, an assignee of any such instrument, contract or other writing shall take and hold such instrument, contract or other writing subject to all claims and defenses of the buyer or lessee against the seller or lessor arising from that specific consumer credit sale or...

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