Rudbart v. North Jersey Dist. Water Supply Com'n

CourtUnited States State Supreme Court (New Jersey)
Citation127 N.J. 344,605 A.2d 681
Parties, 18 UCC Rep.Serv.2d 277 Theodore RUDBART, Natalie Rudbart, Beverly Litoff and Benjamin Weltman, Plaintiffs-Respondents, v. NORTH JERSEY DISTRICT WATER SUPPLY COMMISSION and First Fidelity Bank, N.A., N.J., Defendants-Appellants. Madeline OKIN, for herself and on behalf of all other persons similarly situated, Plaintiff-Respondent, v. NORTH JERSEY DISTRICT WATER SUPPLY COMMISSION and First Fidelity Bank, N.A., N.J., Defendants-Appellants.
Decision Date27 April 1992

H. Curtis Meanor, Newark, for defendant-appellant North Jersey Dist. Water Supply Comm'n (Podvey, Sachs, Meanor & Catenacci, attorneys; H. Curtis Meanor, H. Richard Chattman, and Steven Firkser, on the briefs).

Michael A. Lampert, Newark, for defendant-appellant First Fidelity Bank, N.A., N.J. (Kraft & McManimon, attorneys).

James J. DeLuca, Fort Lee, for plaintiffs-respondents (Okin, Cohen & Hollander, Fort Lee, and Gurtman, Shurkin & Brunt, Passaic, attorneys; James J. DeLuca, Fort Lee, and Thomas J. Brunt, Passaic, on the briefs).

Joseph L. Yannotti, Deputy Atty. Gen., for amicus curiae State of New Jersey, (Robert J. Del Tufo, Atty. Gen. of New Jersey, attorney; Michael R. Clancy, Asst. Atty. Gen., of counsel; Sandra L.K. Manning, Deputy Atty. Gen., on the brief).

Peter N. Perretti, Jr., Morristown, submitted briefs on behalf of amici curiae New Jersey Bankers Ass'n and American Bankers Ass'n, (Riker, Danzig, Scherer, Hyland & Perretti, attorneys; Peter N. Perretti, Jr., Robert Fischer, III, John J. Farmer, Jr., and David P. Arciszewski, on the brief).

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

[t]his 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.

I

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.

A.

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...

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