The Singer Co. v. Gardner , 65 N.J. 403 ( 1974 )

The opinion of the Court was delivered by

Clifford, J.

In this replevin action the district court entered judgment dismissing the complaint and dismissing the counterclaim for damages. Plaintiff appealed to the Appellate Division and defendant filed a cross-appeal. Before argument in the Appellate Division we certified on our own motion, R. 2:12-1.

The nature of the action, the contentions of the parties, and the basic facts are set forth in the opinion of the district court, 121 N. J. Super. 261, 262-266 (1972), as follows:

This is an action in replevin in which plaintiff The Singer Company seeks judgment for possession of certain articles of merchandise sold to defendant, and by way of damages, the balance of the purchase price of said articles allegedly remaining due and unpaid. Defendant denies any indebtedness to plaintiff. He contends that the agreement between him and plaintiff be declared void as unconscionable and by reason of the exaction of wrongful charges by plaintiff in violation of the Retail Instalment Sales Act, N. J. S. A. 17:16C-1 et seq. By way of counterclaim defendant demands damages for the alleged wrongful seizure by plaintiff of the goods in question.

On January 15, 1969 defendant purchased from plaintiff a sewing machine for the agreed purchase price of $400. He paid $05 down on account of the purchase price with the balance to be paid in in-stalments. A sales slip was prepared setting forth the sale, the price (plus sales tax of $12), the down-payment, the balance of $347 remaining due, and showing the “agreed monthly payment” as $14.

On January 21, 1969 defendant signed a “Singer Credit Application” setting forth on the face thereof personal data usually called for on such applications. On the reverse of said application form there appears in reasonably legible type an agreement headed “The Singer One to Thirty-six Credit Plan Agreement.” This agreement sets forth the terms of instalment payments made on this so-called “credit plan.”

On or about February 8, 1969 defendant purchased a Singer TJ-43 vacuum cleaner for the sum of $70. The sales slip covering the transaction indicates a payment of $2.10 on account (the amount of the sales tax), a balance due of $70 and agreed monthly payments of $15.

On May 21, 1969 defendant purchased two more vacuum cleaners, a TJ-43 model for $69.95 and a C-10 model for $79.95, a total purchase price of $149.90. This sales slip showed payment of $4.50 (the amount of the sales tax), the balance of $140.00, and no amount of agreed monthly payments.

Defendant made monthly payments on account of these purchases until July 1909. Thereafter payments were made sporadically until April 24, 3971, when a payment of $100 was made, bringing the amount paid on account to a total of $469. No payments on account were made thereafter. Certain attempts at collection by representatives of plaintiff having been unsuccessful, this action in replevin was instituted by the filing of the complaint on July 13, 1971. A writ of replevin was issued and there were seized thereunder the sewing machine and two vacuum cleaners. No notice of the repossession was given to defendant.

The sewing machine was resold by the plaintiff on April 4, 1972 for $172.95. One U-43 vacuum cleaner was resold on May 27, 1972 for $7.99. No notice was given to defendant of the resales and it is to be noted that such sales were prior to the entry of any judgment in this action. There is no evidence as to whether the resale prices represented the then fair market value of the goods sold. In any event, defendant was credited with the sum of $180.94 realized from the repossession sales. Plaintiff has thus credited defendant with payments totalling $469.60 and proceeds of resale in the sum of $180.94, making total credits of $650.64. The other vacuum cleaner seized under the writ of replevin has not been sold and nothing is credited to defendant by reason of its repossession.

It is to be noted that while the complaint alleges sale of two vacuum cleaners to defendant, the evidence and testimony disclose the sale of three vacuum cleaners, one February 8, 1969 and two on May 21, 1969. Defendant testified that he paid cash in full for the vacuum cleaner purchased in February. The records produced by plaintiff indicate no such payment. Defendant says he was given a receipt for the purchase. He did not produce such receipt, saying he gave it to his mother in Philadelphia for whom he bought the machine. I conclude that the sale in question was not a cash sale as contended by defendant. Defendant claims that he made certain payments with which he was not credited. I find that such payments are not established and I conclude that the charges and credits as stated by plaintiff must be accepted as correct.

Plaintiff’s claim against defendant, then, is summarized as follows:

Total Charges.

Purchases $619.60

Sales taxes 18.60

Service charges 228.87 (time-price differential)

Credit life insurance 3.27 $870.64

Total Credits.

Payments $469.60

Proceeds from repossession sales 180.94 650.54

Total Due $220.10

Defendant contends that the transactions were retail instalment sales, and fall within the provisions of the Retail Instalment Sales Act, N. J. S. A. 17:16C-1 et seq. He contends that plaintiff violated the provisions of the act in that:

(1) The contract failed to set forth the particulars required by N. J. S. A. 17:160-27.

(2) The effective interest, or time-price differential, amounts to an annual rate of 18%, although such interest or time-price differential is limited by the act to 10%, N. J. S. A. 17:16C

(3) Particulars as to separate items were not set forth in additional statements annexed to the contract, as required by N. J. S. A. 17:16C-28.

(4) Defendant was not informed as to allocation of payments or balances due on individual items, as required by N. J. S. A. 17:16C-29.

■ Defendant therefore urges that the contract be held unconscionable and void, and thus unenforceable under N. J. S. 12A:2-302.

Plaintiff concedes that the provisions of the Retail Instalment Sales Act, including the limitation of 10% on the time-price differential, have not been complied with. It contends, however, that these transactions are not retail instalment sales but are “retail charge account” sales, and do not come within the provisions of the act. The principal issue in this ease is whether the transactions are retail instalment sales subject to the provisions of N. J. S. A. 17:16C-1 et seq.

Defendant also contends that the seizure of the goods by plaintiff under the writ of replevin vims wrongful since it was made without notice or an opportunity by defendant to be heard, and that the replevin statute is unconstitutional. Cf. Fuentes v. Slevin, 407 U. S. 67, 92 S. Ct. 1983, 32 L. Ed. 2d 556 (1972 ).¹

The county district court concluded that (1) the Singer Company’s time sales agreement was an installment contract covered by the pre-1971 Retail Installment Sales Act, N. J. S. A. 17:16C-1 et seq., Tather than a revolving charge account outside the Act’s ambit, and (2) that agreement was unconscionable under the rationale of Williams v. Walker-Thomas Furniture Co., 121 U. S. App. D. C. 315, 350 F. 2d 445 (D. C. Cir. 1965) because it was a cross-collateral security arrangement. We are of the view that these conclusions are predicated upon a misinterpretation of two distinct areas of the law. We hold that the agreement in question was neither encompassed by the Retail Installment Sales Act nor unconscionable. Accordingly, we reverse and uphold the plaintiff’s position.

I

Defendant argued that Singer’s “One to Thirty-Six Month Plan” violated the Retail Installment Sales Act as it existed before being amended in 1971, in that it failed to specify the time-price differential, time balance, and time sales price as required by N. J. S. A. 17:160-27; it did not apportion each payment among the separate purchases in proportion to the cash prices of the items purchased, as required by N. J. S. A. 17:16C-29; it did not call for appropriate statements after each purchase, mandated by N. J. S. A. 17:160-28; and its time-price differential, amounted to more than 10% per year, the maximum permitted under N. J. S. A. 17:16C-41. With the exception of the last asserted violation,² plaintiff does not dispute that these provisions were not met. However, it contends that its “One to Thirty-Six Month Plan” was a revolving charge account and therefore not bound by the requirements of the Retail Installment Sales Act.

The court below apparently rejected this contention on two grounds. First, it considered the fact that the scheduled monthly payment does not decline with reduction of the unpaid balance necessarily means that the agreement is an installment sale.³ Second, it believed that a security interest cannot attach to items purchased under a revolving charge account.⁴ In reality, however, the key distinction between the two types of time sales depends upon the method of interest computation. The interest, and thus the time-price differential, N. J. S. A. 17:160-1(l), on an installment sale can be pre-computed for the entire time span over which payments must be made. This sum is immutable and generally cannot be avoided or mitigated by prepayment of the principal.⁵ A revolving charge account, on the other hand, allows planned payments to be pre-paid, with concurrent reduction in interest. The first thirty days are usually interest-free, and if the entire amount is paid within this time, no interest ever becomes due. Also, under the “open-ended” revolving charge plan purchases are made pursuant to one written agreement with the retailer under which the customer can make additional purchases from time to time. A new contract is required for each “close-ended” installment sale. The definitions of the two types of sales are commonly accepted and not a matter for debate. See, e. g., Cecil v. Allied Stores Corp., 513 P. 2d 704, 711 (Mont. Sup. Ct. 1973); Zachary v. R. H. Macy & Co., 31 N. Y. 2d 443, 340 N. Y. S. 2d 908, 293 N. E. 2d 80, 88 (Ct. App. 1972), reh. denied, 32 N. Y. 2d 705, 343 N. Y. S. 2d 1026, 296 N. E. 2d 459 (Ct. App. 1973); State v. J. C. Penney Co., 48 Wis. 2d 125, 179 N. W. 2d 641, 642 (Sup. Ct. 1970).

Tested in the light of the above significant characteristics the Singer Company plan clearly created a revolving charge account. Although the minimum monthly payment required of Gardner each month was a standard $20, the amount of interest included in the twenty dollar payment decreased as the principal was paid off. Thus, for example, if his balance one month were $441.45, his next monthly payment (at the lj4% monthly interest rate) would include $6.62 interest and $13.38 principal. The following month, on the remaining $428.07 principal, his twenty dollar payment would consist of $6.42 interest and $13.58 principal. The interest could not be calculated in advance because, although the minimum payment was standardized, Gardner did have an option of prepaying more than this, diminishing the amount of interest owed in succeeding months. It is not true, as the trial court’s opinion states, that “the purchaser was given no option as to any method or plan of payment.” 121 N. J. Super. at 269.

It is precisely because of this built-in flexibility that the Singer plan cannot be said to have conformed to the requirements of the Retail Installment Sales Act. Section 17:16C-27 requires that the time-price differential as well as the time balance and time sales price be set out in the retail installment contract. Likewise, section 17:16C-41 requires that the time-price differential be computed from the date of the contract to the date of the last installment. See Cecil v. Allied Stores Corp., supra, 513 P. 2d at 711. Conformance to these standards would obliterate the advantages to the consumer inherent in the more flexible revolving charge account system.

Eurthermore, the pre-1971 Act defined a retail installment contract as “any contract * * * to pay the retail purchase price * * * in 2 or more installments over a period of time * * N. J. S. A. 17:16C-1(b) (emphasis added). Under the Singer plan, the full amount could have been paid within the first month in one installment. Again, conformance with this definition would have removed from the Singer Company plan that flexibility which is so advantageous to consumers.

It is also clear that the Singer plan was “open ended,” another feature of revolving charge accounts. The customer could continue to purchase items on the one account without the necessity of applying for new credit on the occasion of each purchase. Gardner in fact took advantage of this feature to make several successive purchases, and therefore apparently did understand the nature of the plan for which he applied. This arrangement was to his benefit in supplying him with a ready and reliable credit source, in simplifying his record-keeping — this by combining a number of debts into one monthly statement —■ and in obviating the need for continual credit investigations, thereby keeping operating costs low, a benefit to both parties. Note, 54 Marquette L. Rev. 223, 228 (1971).

In holding that the Singer plan is an installment sale arrangement, the trial court mistakenly attached critical significance to the fact that a lien was retained by the Singer Company in the goods purchased by Gardner. However, no authority is cited in support of this proposition, nor does research disclose any. In fact, the existence of a security interest is wholly immaterial to classification of a credit plan as either an installment contract or a revolving charge account.

There is no reason why retention of a security interest should be permitted under one type of contract and prohibited under the other. Significantly, under the amended Retail Installment Sales Act retention of a security interest in goods sold through a charge account is permitted. Section 17:16C-30 of the amended Act provides: “Where title to or a lien upon goods sold by the retail seller is retained or taken by the retail seller the retail buyer may be required to insure the goods at the retail buyer’s expense * * Since N. J. S. A. 17:16C-1 defines a “retail seller” in part as one who sells goods pursuant to a retail charge account, sellers who utilize revolving charge accounts thus may retain a lien. Note also that the proposed Uniform Consumer Credit Code § 3.301 authorizes retention of a security interest in such goods, as does the Federal Consumer Credit Protection Act, 15 U. S. C. § 1637(a)(7) (Supp. 1974). Likewise, some state statutes specifically refer to charge account security interests, e. g. Mass. Ann. Laws, ch. 140 C § 6(a) (1972); Tex. Rev. Civ. Stat., art. 5069-6.01 (g) (Vernon’s Ann. 1971).

II

We are further of the view that the court below was in error in holding that the credit plan here under consideration is unconscionable. As suggested above this plan is actually more beneficial to the consumer than would be an installment sale. Its advantages lie in its flexibility, with consequent possible reduction in interest, and in the availability of a continuing ready credit source. Nevertheless, the county district court held that the contract is unconscionable not only because of what it perceived to be lack of compliance with the Retail Installment Sales Act but also because of an apparent misconception as to the nature of the security interest retained by the Singer Company. By classifying the arrangement as a cross-collateral security agreement, the trial court sought to justify a finding of unconscion-ability under the rationale of Williams v. Walker-Thomas Furniture Co., supra.

A cross-collateral security arrangement is one in which a seller retains a security interest in all goods sold to a purchaser until the whole balance has been paid off, no matter how much money has been paid or how long the arrangement lasts. Examining such a clause, the Williams court remanded the case for findings on the uneonseion-ability issue, strongly intimating that it believed the clause in question to be unconscionable.⁶ In so holding, the court relied heavily on the peculiar circumstances of the case. There, a welfare recipient had paid $1,400 over a period of several years, reducing her balance to $164. She then bought a stereo set on which she defaulted, and all items were reclaimed by the seller. Of particular interest to the Williams court was the disparity of bargaining power between the parties and the lack of understanding of the contract terms by the purchaser. The terms were hidden in a maze of fine print and the purchaser was induced to make the final purchase, which she did not need, by a “high pressure” salesman who knew she could not afford it.

Except for the trial court’s decision in this ease, no court since Williams has held cross-collateral security agreements unconscionable. Nor does the opinion of the court below suggest circumstances which would bring this case under the Williams rationale. Instead it seems simply to take the position that Williams held cross-collateral security agreements per se unconscionable. That position is difficult to reconcile with the acceptance of cross-collateral security agreements by the Uniform Commercial Code, N. J. S. A. 12A:9-204(5). This section reads: “Obligations covered by a security agreement may include future advances or other value whether or not the advances or value are given pursuant to commitment." Thus the county district court undertook to declare unconscionable that which the legislature has specifically sanctioned. At the very least this statutory section should have been weighted in any determination of unconscionability under section 2-302. Note, 51 Cornell L. Q. 768, 778 (1966) endorses this approach.

But even if it were correct to assume unconscionability from the lone fact of retained cross-collateral by the seller, the factual basis for the conclusion is absent from the case. The agreement did not create such collateral. Singer claims that each payment was applied, - against the cost of the items in the order purchased.⁷ In the instant ease all items were replevied only because the first, being the most expensive, had not yet been paid off. In fact, even if the method prescribed by the Retail Installment Sales Act for apportioning payments among the various items based on the proportion the price of each bore to the entire debt, neither the sewing machine nor any of the vacuum cleaners would have been paid for in full. All would have been subject to replevin under the Act. Therefore, there is no basis for a finding of unconscionability on this record.⁸

Ill

Although the trial court deemed it unnecessary to discuss the issue of the constitutionality of New Jersey’s Replevin Act, N. J. S. A. 2A:59-1 et seq. in light of its disposition of the case on other issues, we address that question. Defendant Gardner challenges the replevin action taken against him for its failure to afford him notice and a hearing before his property was seized. Fuentes v. Shevin, 407 U. S. 67, 92 S. Ct. 1983, 32 L. Ed. 2d 556, reh. denied, 409 U. S. 902, 93 S. Ct. 177, 34 L. Ed. 2d 165 (1972), held the Florida and Pennsylvania replevin statutes, which are nearly identical to New Jersey’s in relevant respects, violative of due process since they did not require prior notice and hearing. It does not seem debatable that insofar as our statute deviates from that standard, it too is unconstitutional. We have already implied as much by adopting, in 1973, Rule 4:61-1(a), which imposes such requirements. We take this opportunity to remove any uncertainty remaining on this question. Such a disposition of this issue does not affect the instant parties, for we give it purely prospective effect.

IT

In concluding as Ave do that the Singer Company’s “One to Thirty-Six Month Plan” is neither unconscionable nor violative of New Jersey’s pre-1971 statutory provisions, we do not mean to imply that consumer protection is unnecessary as applied to revolving charge accounts. The 1971 amendments encompassing such sales are a welcome and necessary addition to New Jersey’s body of statutory law. However, Ave reject the mistaken definition of installment sales, adopted by the court below, which would include the Singer plan within the reach of the Act as it stood before 1971. Nor do we accept a finding of unconscionability in the absence of circumstances far more compelling than are present here.

Accordingly, on plaintiff’s appeal the judgment of the district court is reversed and the case remanded for entry of judgment for plaintiff and for possession of the articles in question. On defendant’s cross-appeal- the judgment of dismissal of the counterclaim for damages is affirmed. No costs.

1 This recitation mistakenly indicates, in the first sentence, that plaintiff sought both judgment for possession and damages. The prayer for relief was pleaded in the alternative, plaintiff seeking either possession or damages.

2 The county district court concluded that “[tlhe use of the device of a ‘credit card’ * *■ * enable [d] the seller to impose a time-price differential greater than that permitted by the act.” 121 N. J. Super. at 269. However, mathematical analysis demonstrates that in fact the differential imposed by the Singer plan was less than permitted by the Act by twelve cents. Apparently, $10 per $100 per year is an effective approximate financial charge of 18% per year, or 1%% per month (The Singer Company charge) on a declining balance.

3 The clause in the Singer contract providing for a schedule of payments reads as follows:

My monthly payment will be the larger of: 1. The agreed monthly payment; or 2. the company’s minimum monthly payment listed on the schedule of payments below. I will jjay the amount due upon the receipt of each statement; however, if within 30 days from my billing date I pay the full amount shown on the statement, no time price differential or service charge on such amount will be charged on any subsequent statement. My scheduled monthly payment will not decline as my unpaid balance is reduced.

4 The clause providing for retention of a security interest reads:

Title to the goods purchased hereunder shall remain in you [Singer] until the unpaid balance of each separate purchase is fully paid. I will not dispose of the goods or encumber them without your written consent, and will protect you against all loss or damages to the goods from the time they are delivered until I have fully paid for them.

5 In New Jersey this feature has been modified by statute. N. J. S. A. 17:16C-43 provides that prepayment of principal reduces the total interest due according to a complex formula.

6 Although the U.C.C. was not effective at the time of the Williams decision, the court held that its unconscionability section, section 2-302, was a codification of the common law of the District of Columbia, and essentially found unconscionability under it.

7 The “First-in-First out” method is the recommended approach under the proposed Uniform Consumer Credit Code, § 2.409. As White and Summers in their text on the Uniform Commercial Code have said, “We believe that a wise draftsman will provide for a first-in, first-out method of pro ration * * * A FIFO pro ration is blessed by the UCCC and will avoid the difficulty suggested in the Walker-Thomas case, for the debtor will free items of collateral from the security interest as he pays.” White and Summers, Uniform Commercial Code 802 (1972).

8 For a more complete discussion of unconscionability. see an excellent note on the Williams case, 51 Cornell L. Q. 768 (1966) and Leff, “Unconscionability and the Code — The Emperor’s New Clause,” 115 U. Pa. L. Rev. 485, 551-56 (1967).