Rudbart v. North Jersey District Water Supply Commission
1992 N.J. LEXIS 37, 127 N.J. 344, 605 A.2d 681 (1992)
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Rule of Law:
The doctrine of contracts of adhesion, which allows courts to invalidate unfair, non-negotiated terms, does not apply to publicly-traded securities due to the public policy favoring certainty and transferability in financial markets. However, a trustee that engages in selective and unfair dealing with beneficiaries may be liable for unjust enrichment for any profits it accrues as a result of that conduct.
Facts:
- The North Jersey District Water Supply Commission (Commission) issued registered project notes, with First Fidelity Bank (Fidelity) acting as an underwriter and the indenture trustee.
- The terms of the notes, printed in the offering statement and on the notes themselves, permitted the Commission to redeem the notes prior to maturity.
- The redemption provision specified that notice would be given via publication in newspapers in Newark and New York City.
- The terms also stipulated that upon the redemption date, the notes would cease to bear interest.
- In 1986, the Commission exercised its option to redeem the notes early and Fidelity published the notices as required, but did not mail notices to the registered noteholders whose names and addresses it possessed.
- Fidelity's investment department, however, provided separate, direct notice of the early redemption to its own customers who held the notes.
- As a result, holders of approximately $10 million in notes did not become aware of the redemption, failed to tender their notes on time, and lost subsequent interest payments.
Procedural Posture:
- Holders of the notes (plaintiffs) filed consolidated class-action lawsuits in the New Jersey Law Division (trial court) against the Commission and Fidelity.
- The parties filed cross-motions for summary judgment on liability.
- The Law Division granted summary judgment for defendants, finding the notice-by-publication provision to be legally binding and not deficient.
- Plaintiffs appealed the trial court's decision to the New Jersey Appellate Division.
- The Appellate Division reversed the Law Division's judgment, holding that the notes were contracts of adhesion and that the notice-by-publication provision was unfair.
- Defendants, the Commission and Fidelity, petitioned the Supreme Court of New Jersey for certification, which was granted.
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Issue:
Does the doctrine of contracts of adhesion apply to publicly-traded securities, thereby allowing a court to invalidate a term, such as a notice-by-publication provision for early redemption, on the grounds of unfairness?
Opinions:
Majority - Per Curiam
No, the doctrine of contracts of adhesion does not apply to invalidate the notice provision of these publicly-traded securities. The court reasoned that unlike consumer necessities, securities are traded in a vast, open, and competitive market where investors are not under economic compulsion to accept any single offering. Enforcing the explicit terms of securities advances the public policies of certainty and transferability embodied in Article 8 of the Uniform Commercial Code. Furthermore, the legislative scheme of securities regulation is based on full disclosure of terms, not a judicial review of their substantive fairness. However, the court found that Fidelity's selective notification of its own customers constituted a lack of fair dealing. Because Fidelity may have been unjustly enriched by earning interest or 'float' on the unredeemed funds, the case is remanded to determine if Fidelity profited from its actions and, if so, to compel it to disgorge those profits to the plaintiffs under a constructive trust theory.
Concurring-in-part-and-dissenting-in-part - Petrella, P.J.A.D.
Yes, the securities are contracts of adhesion and the notice provision was patently unfair. The court should not create an exception for securities, as the 'take-it-or-leave-it' nature of the transaction is the defining feature of an adhesion contract, regardless of whether a necessity is involved. The notice provision was unreasonable, and fair dealing required mailed notice to registered holders. However, he concurs with the majority's ultimate remand based on the theory of unjust enrichment (Part IV), finding that Fidelity's conduct in selectively notifying its own customers was a clear breach of fair dealing that warrants an equitable remedy.
Concurring-in-part-and-dissenting-in-part - Gaulkin, P.J.A.D.
No, the court correctly found the contract's notice provision enforceable due to the unique policy considerations in securities markets. However, the majority's decision to then grant a remedy based on unjust enrichment is patently contradictory. A party cannot be unjustly enriched by a benefit—the cessation of interest payments—that is explicitly granted by an enforceable term of the contract. By finding a remedy in Part IV, the majority improperly alters the written agreement, undermining the very certainty and predictability it sought to protect in Part III.
Dissenting - Clifford, J.
No, the notice provision is not unfair, and there is no claim for unjust enrichment. The majority opinion is contradictory for first acknowledging the notes fit the definition of adhesion contracts but then refusing to apply the doctrine. The notice provision was not unfair because it was clearly disclosed and within the noteholders' reasonable expectations under securities law. He joins Judge Gaulkin's dissent from the unjust enrichment holding in Part IV and would reverse the Appellate Division and reinstate the trial court's judgment for the defendants.
Analysis:
This decision carves out a significant exception to the contract of adhesion doctrine, insulating publicly-traded securities from judicial review for substantive fairness and prioritizing the stability and predictability of financial markets. It affirms that full disclosure is the primary protection for investors under securities law. However, the case simultaneously establishes that compliance with the literal terms of a contract does not shield a fiduciary from liability for unjust enrichment if it engages in bad faith or self-dealing. The holding thus creates a notable tension: while courts will not rewrite the terms of a security, they will use equitable doctrines to police the conduct of fiduciaries acting under those terms.
