State v. Avco Financial Service of New York Inc.

• Decision Date: 05 June 1980
• Citation: 406 N.E.2d 1075,429 N.Y.S.2d 181,50 N.Y.2d 383
• Parties: , 406 N.E.2d 1075, 29 UCC Rep.Serv. 60 In the Matter of the STATE of New York, Respondent, v. AVCO FINANCIAL SERVICE OF NEW YORK INC., Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 181

429 N.Y.S.2d 181

50 N.Y.2d 383, 406 N.E.2d 1075, 29

UCC Rep.Serv. 60

In the Matter of the STATE of New York, Respondent, v. AVCO FINANCIAL SERVICE OF NEW YORK INC., Appellant.

Court of Appeals of New York.

June 5, 1980.

Alvin M. Stein, Stanley R. Stern, P. C., Amos Alter and Kenneth R. Davis, New York City, for appellant.

Robert Abrams, Atty. Gen. (Shirley Adelson Siegel, William J. Kogan, Jacquelyn R. Bullock and Robert S. Hammer, Asst. Attys. Gen., New York City, of counsel), for respondent.

K. Wade Eaton, Rochester, V. Jerome Luhn, Saratoga Springs, and Peter D. Braun, Bath, for Hugh Wilkes and others, amici curiae.

John Carter Rice and Gerard L. Conway, Albany, for New York State Consumer Finance Association, amicus curiae.

OPINION OF THE COURT.

FUCHSBERG, Judge.

The Attorney-General, acting on a consumer complaint, instituted this special proceeding under subdivision 12 of section 63 of the Executive Law to enjoin respondent Avco's use of a security clause in a loan agreement form. The petition alleged that the clause was illegal and void as against public policy on the theory that it constituted an impermissible waiver of the personal property exemption afforded a judgment debtor under CPLR 5205 (subd. (a)). Special Term summarily declared the clause invalid for this reason. Although the Appellate Division, over a single dissent, affirmed the order and judgment, it did so on the ground that the provision was unconscionable (70 A.D.2d 859, 418 N.Y.S.2d 52). We now reverse, holding that it is not illegal and that the determination of unconscionability was improperly made without any opportunity for an evidentiary presentation as to the commercial and bargaining context in which the clause appears.

The clause at issue is one regularly inserted by Avco, a finance company, in its loan agreements. Its terms unmistakably provide: "This loan is secured by * * * all household goods, furniture, appliances, and consumer goods of every kind and description owned at the time of the loan secured hereby, or at the time of any refinance or renewal thereof, or cash advanced under the loan agreement secured hereby, and located about the premises at the Debtor's residence (unless otherwise stated) or at any other location to which the goods may be moved."

It is not denied that this language must be understood to create a security interest in items of personal property which include the ones made exempt from the reach of a judgment creditor by CPLR 5205 (subd. (a)). ¹ From its inception, this statute along with its venerable antecedents has embodied the humanitarian policy that the law should not permit the enforcement of judgments to such a point that debtors and their families are left in a state of abject deprivation (see Stewart v. Brown, 37 N.Y. 350, 351; Griffin v. Sutherland, 14 Barb 456, 459).

It is well recognized, however, that simply because the law exempts such property from levy and sale upon execution by a judgment creditor does not mean that the exemption statute was intended to serve the far more paternalistic function of restricting the freedom of debtors to dispose of these possessions as they wish (see Montford v. Grohman, 36 N.C.App. 733, 245 S.E.2d 219; Mutual Loan & Thrift Corp. v. Corn, 182 Tenn. 554, 188 S.W.2d 345; Swan v. Bournes, 47 Iowa 501, 503; 1 Jones, Chattel Mortgages and Conditional Sales (6th ed), § 114). No statute precludes exempt property from being sold; nor is there any which expressly interdicts the less drastic step of encumbering such property. So, for example, while contractual waivers of a debtor's statutory exemptions are usually held to be void (see Caravaggio v. Retirement Bd. of Teachers' Retirement System, 36 N.Y.2d 348, 357-358, 368 N.Y.S.2d 475, 329 N.E.2d 165; Kneettle v. Newcomb, 22 N.Y. 249), the law has not forbidden a debtor to execute a mortgage upon the property so protected and thus create a lien which may be foreclosed despite the property's exempt status (see Banking Law, § 356 (governing security interests in household furniture); Uniform Commercial Code, § 9-102, subd. (1); ² Matter of Brooklyn Loan Corp. v. Gross, 259 App.Div. 165, 166, 18 N.Y.S.2d 179; Emerson v. Knapp, 129 App.Div. 827, 114 N.Y.S. 794; 6 Weinstein-Korn-Miller, N.Y.Civ.Prac., par. 5205.7). ³ The clause here permits no more and, hence, cannot be said to contravene the exemption statute.

The Attorney-General nevertheless argues that the clause should be invalidated under the doctrine of unconscionability. The contention, as accepted by the majority of the Appellate Division, is that "the inequality of bargaining position and the granting to the creditor of enforcement rights greater than those which the law confers upon a judgment creditor armed with execution, lead inevitably to the conclusion that the absence of choice on the part of the debtor left him with no recourse but to grant to his creditor rights which, in good conscience, the law should not enforce" (70 A.D.2d 859, 860, 418 N.Y.S.2d 52). The clause is also alleged to be unconscionable in that its broad terms create security interests even in items not sold or financed by Avco and function mainly as an in terrorem device to spur repayment.

In this connection, we note initially that the statute under which this proceeding was brought (Executive Law, § 63, subd. 12) lists "unconscionable contractual provisions" as a type of "fraudulent" conduct against which the Attorney-General is authorized to move. Furthermore, an application for injunctive or other relief under this provision is one which may properly look to the exercise of a sound judicial discretion (State of New York v. Princess Prestige Co., 42 N.Y.2d 104, 108, 397 N.Y.S.2d 360, 366 N.E.2d 61). But the petition here provided no opportunity for the operation of such discretion on the issue of unconscionability since it alleged only that the clause per se was "illegal" and "void as against public policy and contrary to law", theories which, as we have seen, are not consonant with established law. Indeed, the only ground presented to nisi prius was that the clause violated CPLR 5205 (subd. (a)); the petitioner never raised an unconscionability argument until it arrived at the Appellate Division.

As a general proposition, unconscionability, a flexible doctrine with roots in equity (see Chesterfield v. Janssen, 2 Ves. Sen. 125, 155-156; 28 Eng.Rep. 82, 100 (Ch. 1750); Hume v. United States, 132 U.S. 406, 411, 10 S.Ct. 134, 136, 33 L.Ed. 393), requires some showing of "an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party" (Williams v. Walker-Thomas Furniture Co., D.C.Cir., 350 F.2d 445, 449). The concept, at least as defined in the Uniform Commercial Code which both parties seem to agree governs the transactions at issue here is not aimed at "disturbance of allocation of risks because of superior bargaining power" but, instead, at "the prevention of oppression and unfair surprise" (McKinney's Cons.Laws of N.Y., Book 62 1/2, Uniform Commercial Code, § 2-302, Official Comment 1). To that extent at least it hailed a further retreat of caveat emptor.

By its nature, a test so broadly stated is not a simple one, nor can it be mechanically applied (see White and Summers, Handbook on the Uniform Commercial Code (2d ed), p. 151). So, no doubt precisely because the legal concept of unconscionability is intended to be sensitive to the realities and nuances of the bargaining process, the Uniform Commercial Code goes on to provide: "When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination" (Uniform Commercial Code, § 2-302, subd. 2).

That such evidence may be crucial is made plain too by the drafters' own explication of unconscionability as "whether * * * the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract" (McKinney's Cons.Laws of N.Y., Book 62 1/2, Uniform Commercial Code, § 2-302, Official Comment 1; see Wilson Trading Corp. v. David Ferguson, Ltd., 23 N.Y.2d 398, 403-404, 297 N.Y.S.2d 108, 244 N.E.2d 685...