232 A.2d 405 (N.J. 1967)
In November 1962, Jean Owen responded to a newspaper advertisement by Universal Stereo Corporation offering 140 stereophonic record albums for $698 on installment, with a free Motorola stereo record player.1 A representative visited the Owens' home, and on November 6, 1962, Mr. and Mrs. Owen signed a retail installment contract for the albums and player, along with a promissory note for the time balance of $819.72 payable in 36 monthly installments of $22.77 to Universal Stereo Corporation.2
The contract and note were assigned and endorsed to Unico, a New Jersey partnership formed specifically to finance Universal Stereo Corporation's sales.3 Under their August 24, 1962 agreement, Unico provided financing secured by assignment of customer contracts and notes, imposed credit standards, required recording of contracts, and exercised significant control over Universal's operations, including the right to inspect records and deal directly with customers upon default.4
Owen received the record player and the initial 12 albums but no further deliveries despite continued payments for 12 months totaling $303.24 with the $30 deposit.5 When Universal became insolvent and ceased deliveries, Mrs. Owen stopped payments.6 In July 1964, Unico's attorney contacted the Owens demanding payment on the note.7
The District Court entered judgment for Owen after finding Unico was not a holder in due course of the note.8 The Appellate Division affirmed, and the Supreme Court of New Jersey granted certification to review the matter.9
Whether plaintiff Unico is a holder in due course of defendant’s note?10
Under the Uniform Negotiable Instruments Law, N.J.S.A. 7:2-52, a holder in due course is one who took the instrument in good faith and for value.11 In consumer goods financing, a financer who maintains a close relationship with the seller, participates in or controls the underlying transaction, supplies or approves the contract forms, and knows of the executory character of the seller's performance obligations does not qualify for holder in due course status.12
No. Unico was formed expressly to finance Universal Stereo Corporation.13
It entered an August 24, 1962 agreement that gave it extensive control over Universal's operations, including the power to impose credit qualifications on customers, require recording of contracts, inspect records at any time, place representatives on Universal's premises, and deal directly with buyers upon Universal's default.14 Unico also had a decisive hand in fashioning the standardized form contract and note used in the Owen transaction and set the maximum installment payment period at 36 months.15 The underlying sale contract was hyper-executory.16
Universal's obligation to deliver all 140 albums extended 2-1/3 years beyond the date Owen would finish paying the full time balance, leaving 40 percent of the albums undelivered after payment in full.17 These facts demonstrate that Unico was intimately involved in the transaction from its inception and cannot claim the protected status of a good faith purchaser for value.18
Unico is not a holder in due course of Owen's note and remains subject to the defense of failure of consideration arising from Universal's default.19
Whether the waiver of defenses clause in the sale contract is enforceable against the buyer?20
A waiver of defenses clause in a consumer goods conditional sale contract is void as against public policy because it contradicts the prerequisites for negotiability established by the Negotiable Instruments Law, violates the spirit of N.J.S.A. 2A:25-1 by denying the obligor defenses against the assignor, and contravenes the state's policy of protecting conditional vendees from imposition by installment sellers.21
No. The clause appeared as the fifth of eleven fine-print paragraphs on the reverse side of the standardized contract without any emphasis or explanation to Owen of its significance.22 Its evident purpose was to allow assignees such as Unico to enforce payment as though they were holders in due course even when the seller failed to perform its executory delivery obligations.23 Such one-sided provisions in consumer goods transactions create opportunities for misuse and are therefore unenforceable on grounds of public policy and unconscionability.24
The waiver of defenses clause is unenforceable against Owen.25