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Scott v. Mayflower Home Improvement Corp.

363 N.J. Super. 145, 831 A.2d 564 (Law Div. 2001)

CONTRACTORS; MORTGAGES; ASSIGNEES—The FTC Holder Rule is an exception to the doctrine that a holder in due course of a negotiable instrument takes free of almost all claims and defenses that could have been asserted against the original creditor and it applies to consumer contracts such as home improvement contracts.

A class action was filed against a home improvement company and lenders who took assignment of promissory notes and mortgages that were given to the home improvement company in connection with repairs that were to be paid for in installments by the class-member homeowners. The homeowners contended that they were “victimized by unscrupulous home contractors.” Specifically, they alleged that they lived in minority neighborhoods and were targeted by unlicensed sales people who prepared contracts specifying the work in general terms, but omitting “the name, make, quality and model of the products and materials to be used.” Further, the contracts did not specify any interest rate or a total cost. The work allegedly was done in “a shoddy or incomplete manner often using poor quality materials.” For those reasons, the homeowners contended that their contracts, notes, and mortgages were “illegal, void and unenforceable because they violate[d] or were obtained by practices in violation of the New Jersey Consumer Fraud Act (CFA) and the New Jersey Home Repair Financing Act (HRFA).”

With that as background, the Court framed “[t]he primary question in this class action [to be] the extent to which financial institutions who purchase consumer home repair contracts, promissory notes, and mortgages are subject to claims and defenses of the home owners against the home repair contractors.” The assignees argued that they were “holders in due course of negotiable instruments, and therefore immune from the claims of the class members.” The “holder in due course doctrine ... insulates a good faith holder in due course of a negotiable instrument from almost all claims and defenses that the debtor could assert against the original creditor.” There is, however, a relatively recent body of law restricting the use of the doctrine. One such restriction is the FTC Holder Rule which modifies the holder in due course doctrine and provides that holders of consumer contracts are “subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained with the proceeds” thereof. Also, the assignees contended that the Truth In Lending Act (TILA) barred “claims against them by consumers unless the violations of law are apparent on the face of the loan instruments.” The general body of law is that “the violation of the TILA must be apparent on the face of the instrument notwithstanding the broad language of the FTC Holder Rule.” Here, however, the claims before the Court were state law claims based on state consumer laws. They were not claims under the TILA. According to the Court, there was “[n]othing in the Legislative history of the TILA and its amendments that suggests that Congress intended to abolish the FTC Rule in cases in which the consumer’s claim is brought under state rather than federal law.” Consequently, the TILA defense posed by the assignees was rejected.

The assignees also argued that the New Jersey statute which “provides that to the extent certain enumerated New Jersey statutes, including the HRFA, are inconsistent with the TILA, compliance with TILA shall be construed to be compliance with these New Jersey statutes.” According to the Court, the most that can reasonably be read into that statute “is that lenders and contractors who comply with the TILA disclosure requirements are not subject on TILA claims to any greater requirements under the HRFA.” Consequently, the existence of the New Jersey statute did not bar the class members from relief under the FTC Holder Rule or under applicable New Jersey consumer protection statutes and regulations.

The contract and the assignees also contended that the class members failed to show any “‘ascertainable loss or causation for’ under the CFA.” The Court, however, thought differently. It found that the home improvement contractor required binding contracts to be executed. The retail installment contract was falsely backdated. The price was unconscionably high. The description stated on the home repair contract “was so vague that it gave no objective basis to determine what work was to be done and what materials were to be used or installed.” Further, the HRFA prohibits licensed home contractors from making cash loans. In violation of that statute, such cash loans were made. With that and other evidence before the Court, it felt that the class members “were the victims of outrageous fraudulent practices [and could] very likely show that they suffered ascertainable losses within the meaning of the New Jersey Consumer Fraud Act.”

The assignees also raised a number of factual defenses, all of which were rejected by the Court. Summary judgment in favor of the class members was denied, although partial summary judgment was granted, setting forth that the claims could be asserted against the assignees “pursuant to the FTC Holder Rule, except that recovery against the assignees [could] not exceed the amount paid by the class member[s].” Further, class members were entitled to obtain restitution from the assignees of monies paid under the contracts unless the assignees could prove that the class members conspired with home contractors to defraud the assignees through the use of cash loans.

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