author: Matthews, J. A. D.

text:
    THE STATE OF NEW JERSEY, PLAINTIFF-APPELLANT, v. ANTHONY FERRANTE, ALFRED SALERNO, THOMAS BONFONTI, RAYMOND MASSARO, KENNETH LUCIANIN, RICHARD REAN, AND SALVATORE LOCASCIO, DEFENDANTS-RESPONDENTS.
    Superior Court of New Jersey Appellate Division
    Argued February 16, 1970
    Decided August 7, 1970.

      Before Judges Goldmanm, Lewis and Matthews.

      Mr. John P. Goceljak, Assistant Prosecutor, argued the cause for appellant (Mr. Joseph D. J. Gourley, Passaic County Prosecutor, attorney).

      Mr. Charles C. Carella argued the cause for respondents Ferrante, Salerno and Massaro (Messrs. Citrino, Carella d Balsam, attorneys; Mr. William S. Bonanno on the brief).

      Mr. Benedict E. Lucchi filed a brief for respondent Massaro (Messrs. Lucchi & Conway, attorneys).

      Mr. William E. Bellinger argued the cause for respondents Lucianin, Rean and Locascio (Messrs. Sellinger & Chester, attorneys).

      Mr. Louis Santorf filed a brief for respondent Lucianin.
   The opinion of the court was delivered by

Matthews, J. A. D.

The State appeals from the dismissal of an indictment charging the seven defendants with conspiracy to obstruct justice (N. J. S. A. 2A:98-1 and 2A:98-2).

In May 196? Detective Decker of the State Police was assigned to the Passaic County Prosecutor’s office to handle gambling investigations. Several months thereafter he was approached by defendant Massaro, also a policeman, who allegedly solicited his complicity in an arrangement with gambling interests. Decker immediately reported the proposal to his superiors and was instructed to play along. Massaro then introduced Decker to defendant Salerno, who explained that the detective would receive certain sums of money for keeping the gamblers informed as to planned raids to be made by the police, and for suppressing other information turned up in his investigations. The grand jury testimony reveals a long series of conferences and communications among Decker and defendants Salerno, Eerrante and Massaro over the course of the succeeding months.

Massaro, Eerrante and Salerno were indicted by a Bergen County grand jury for bribery and conspiracy to bribe. They pleaded guilty to the conspiracy charges and were sentenced to prison. Subsequently, the Passaic County grand jury indicted the same defendants, along with three members of the Passaic Police Department’s anti-gambling squad, on charges of conspiracy to obstruct justice and the due administration of the laws. N. J. S. A. 2A:98-1; N. J. S. A. 2A:98-2. Defendants Massaro and Eerrante (but not Salerno) moved to have the indictments dismissed on the grounds that they constituted double jeopardy. The trial judge found that both the Bergen and Passaic indictments arose from the same conspiracy and therefore granted defendants’ motions.

Shortly thereafter defendants Lucianin, Rean and Locascio moved to have the indictment dismissed as to them on the ground that there had been no legel or competent evidence submitted to the Passaic County grand jury on which to base it. The judge concluded that, having read the record, he was “unable to find sufficient testimony produced before the grand jury which would substantiate and justify the return of an indictment against defendants Rean, Locascio, and Lucianin, charging each or any of them with conspiracy.” Accordingly, he granted the motions for dismissal.

I. Dismissal of Indictments — Double Jeopardy

The State first urges that the prior conviction of three of the defendants for conspiracy to commit bribery should not preclude later indictments for conspiracy to obstruct justice and the due administration of the laws. The Passaic County indictment essentially charges defendants with a broad conspiracy to withhold official information and secretly to transmit such information to the criminal element, in-eluding but not limited to tile bribery of Detective Decker. The State argues that the indictments charged separate and distinct offenses, thereby avoiding the defense of double jeopardy. Defendants counter by urging that both of the alleged conspiracies arose out of the same transaction and would be proved by the same evidence; alternatively, they contend that, in any event, one continuous conspiracy cannot be split up into separate conspiracies for the purpose of multiple prosecutions.

In State v. Currie, 41 N. J. 531 (1964), the court rejected strict adherence to either the “same evidence” test or the “same transaction” test, opting instead for a broader analysis of the multiple prosecutions in view of the policies underlying the double jeopardy proscription. Here the second indictment, if proved, covers a conspiracy of greater dimensions than the bribery of Detective Decker. In fact, while the sole witness would be the same, the State’s case might well revolve around the alleged bribery of other police officers and therefore be distinct from the Bergen County prosecution. However, to the extent that the Passaic County prosecution is based on the bribery of Decker, the case involves a second trial on the same offense, no matter how variously it might be labeled.

Nonetheless, it is well established that the State may not carve up a single conspiracy into smaller conspiracies for the purpose of multiple prosecutions. See Scarlett v. State, 201 Md. 210, 93 A. 2d 753 (Ct. App. 1953); United States v. Cohen, 197 F. 2d 26 (3 Cir. 1952); United States v. Palermo, 410 F. 2d 468 (7 Cir. 1964). If, in fact, the alleged conspiracy is but one overall collusive arrangement, it must be treated as such by the prosecution.

Here, the Passaic County indictment alleges virtually the same overt acts of illegality as did the Bergen County indictments, with the addition of the allegations as to the other police officers, based, however, on rather flimsy shreds of circumstantial inference. Essentially, both cases involved the attempted bribery of the police officer as part of a single plot to circumvent the workings of the law. While there might be a technical distinction between the two indictments, it is apparent that they are in essence identical, although the later one is coupled with the tenuous charge as to the other policemen. While bribery of the other officers would be a separate offense if proved —• and that is highly unlikely on the evidence thus far produced — both indictments center in substance on the bribery of Decker. Accordingly, we find that the standards of double jeopardy to have been violated and the trial judge correctly dismissed the indictment as to Massaro and Ferrante.

II. Dismissal of Indictments — Sufficient Legal and Competent Evidence

The three indicted Passaic police officers moved to have the indictments dismissed as against them on the grounds that the grand jury had lacked sufficient legal and competent evidence on which to support the charges. The trial judge agreed and granted the motions. The State argues that, given the necessarily circumstantial nature of proof in most conspiracy cases, the testimony adduced below was sufficient to support the indictments, citing State v. Graziani, 60 N. J. Super. 1, 13 (App. Div. 1959), affirmed o. b. 31 N. J. 538 (1960), cert den. 363 U. S. 830, 80 S. Ct. 1001, 4 L. Ed. 2d 1524 (1960).

Ordinarily, a court should not exercise its power to dismiss an indictment except on the clearest and plainest grounds, but where evidence is clearly lacking it is the duty of the court to set aside the charges. State v. Weleck, 10 N. J. 355, 364 (1952); State v. Donovan, 129 N. J. L. 478, 483 (Sup. Ct. 1943).

We have read the transcript of testimony before the grand jury which consists solely of the testimony of detective Decker. The greatest portion of that testimony is indubitably hearsay, and the State may well face problems of proof should the indictment be brought to trial. This, however, we deem to be irrelevant when we consider the power of courts to review an indictment returned by a grand jury. Our present Constitution provides in Art. I, § 8, that “no person shall be held to answer to a criminal offense, unless on the presentment or indictment of a grand jury * * It is silent as to the method of presentment and the evidence upon which an indictment must rest. This same observation was made in State v. Dayton, 23 N. J. L. 49, 57 (Sup. Ct. 1850) with respect to the similar provision (Art. I, § 9) of our 1844 Constitution which was substantially identical to the present Art. I, § 8, above.

Dayton involved a motion to quash an indictment on the ground that it had not been based upon competent evidence. The claimed incompetence, as here, was hearsay. Chief Justice Green, in his opinion for the former Supreme Court, made the following observation:

* * * But conceding that the proposition is fully established, that there was not legal and competent evidence before the grand jury, does that afford the subject matter to sustain either a motion to quash or a plea in abatement? We are clearly of opinion, that in this state, at least, it does not. If the position be sound, that every indictment not found upon the production of legal and competent evidence before the grand jury is essentially vicious, it follows that in all cases where the witnesses produced before the grand jury are from any cause legally disqualified or incompetent to testify, or where any essential link in the chain of testimony is sustained by evidence not in itself legal, the indictment cannot be sustained, although there be ample competent testimony, not produced before the grand jury, to sustain the charges of the indictment. [23 N. J. L., at 56]

This rule has been recognized as controlling the review power of courts over indictments when a question of competency of evidence presented to a grand jury is made. State v. Ellenstein, 121 N. J. L. 304, 310 (Sup. Ct. 1938); State v. Donovan, 129 N. J. L. 478, 483 (Sup. Ct. 1943); State v. Garrison, 130 N. J. L. 350, 351 (Sup. Ct. 1943). Cf. State v. Laws, 50 N. J. 159 (1967). The same rule prevails in the federal jurisdiction. See Costello v. United States, 350 U. S. 359, 76 S. Ct. 406, 100 L. Ed. 397 (1956). We note that more challenges to the validity of indictments on evidentiary grounds have been made in recent months, principally because of the change in the rules permitting defendants access to grand jury testimony. See e. g., R. 3:13-3; R. 3:17-1. However, the adoption of rules giving access to grand jury testimony does not, in our judgment, change the substantive rule of law we have just noted. Absent misconduct or abdication by grand jurors, the question whether evidence before a grand jury was competent or incompetent, we find to be irrelevant on a motion to dismiss the indictment.

Nor do we find that the inclusion of the following language in the stock charge given by assignment judges to grand jurors:

Ycrar function is principally to investigate allegations of violations of criminal law, and determine after hearing legal evidence by that I mean not mere hearsay or rumor — whether any offense has been committed, and if so, who should be accused of the offense. (Emphasis added)

grants to courts any greater power over the deliberations of the grand jury, or imposes any greater obligations on grand jurors than existed theretofore. Jurors are obviously not judges of the competency or incompetency of evidence presented to them. In the case of petit jurors, the judge presiding over the case exercises that function for the jurors. In the case of grand jurors, there is no presiding officer, save the foreman — a layman. Most of the profession will agree, we are sure, that lawyers and judges have difficulties with the hearsay rule and its numerous exceptions. Considering this, we cannot conceive that the law should place on 23 laymen an obligation which those learned in the law can find taxing at times.

The indictment as to Kenneth Lucianin, Richard Rean and Salvatore Locascio should not have been dismissed.

The dismissal of the indictment as to Anthony Ferrante, Raymond Massaro and Alfred Salerno is affirmed. The dismissal as to Kenneth Lucianin, Richard Rean and Salvatore Locascio is reversed and remanded for trial.


source: Caselaw Access Project

license: Public Domain

text:
    AGATHA KLACIK AND MICHAEL KLACIK, HER, HUSBAND, PLAINTIFFS-APPELANTS, v. GEORGE KOVACS, DEFENDANT. AND THE HOME INSURANCE COMPANY, DEFENDANT-RESPONDENT.
    Superior Court of New Jersey Appellate Division
    Argued May 4, 1970
    Decided August 7, 1970.

      Before Judges Goldmann, Lewis and Matthews.

      Mr. Robert M. Graham argued the cause for appellants (Messrs. Champi, Graham & Yurasko, attorneys; Mr. Robert Golden and Mr. Jack L. Lintner on the briefs).

      Mr. Norman S. Karpf argued the cause for respondent (Messrs. Morgan, Melhuish, Monaghan, McCoid & Spielvogel, attorneys).
   The opinion of the court was delivered by

Matthews, J. A. D.

Plaintiffs appeal from the trial court’s denial of their application for an order granting a counsel fee and costs against defendant Home Insurance Company (Home) out of the sum which that company collected under the medical payment subrogation clause contained in the policy which it issued to plaintiff Michael Klacik.

Agatha Klacik was involved in an automobile accident with defendant Kovacs while operating the automobile owned by her husband Michael. Under the terms of the policy issued to Michael, Agatha became entitled to reimbursement from Home of reasonable medical and dental expenses not exceeding $1,000, up to one year from the date of the accident. She was reimbursed for $973.

Plaintiffs thereafter instituted an action for personal injuries and property damage against Kovacs which was settled by their attorney for $33,000. After the settlement, plaintiffs obtained an order to show cause in the action, under which they sought disbursal of the $33,000 to include an award of counsel fee and costs to their attorney on the entire settlement, including the $973 payable to Home Insurance Company. The insurance company was thus made a defendant in this action and is respondent on this appeal. The trial court ruled that Home was entitled to the full amount of $973 under its policy, and entered the order here under appeal.

We observe at the outset that neither the policy nor any other agreement granted plaintiffs’ attorney the right to an attorney’s fee or costs out of the funds payable to Home under its subrogation rights. Plaintiffs do not contest the company’s right to subrogation under the policy but argue that a counsel fee and costs should have been allowed out of the $973 by analogy to N. J. S. A. 34:15-40 in workmen’s compensation matters. Specifically, they ask for one-third of the $973 plus $200 in costs.

The question here involved is of novel impression in this jurisdiction. There are, however, cases involving this issue in other jurisdictions which express contrary views. One, as expressed in Illinois Automobile Ins. Exch. v. Braun, 280 Pa. 550, 124 A. 691, 36 A. L. R. 1262 (Sup. Ct. 1924), is that insureds are not entitled to have deducted from the amount duo an insurer under a subrogation clause the counsel fees and expenses incurred in litigation against the tortfeasor:

* * * What a party lias to expend in tlie securing of a judgment is never regarded as something to be added to that which is recovered. Even technical costs were not recoverable at common law; they are solely the creature of statute. There being no statute, nor part of the contract which covers such expenses, the insured is not entitled to them. [124 A., at 693-694]

The same result was reached in Commercial Union Ins. Co. v. Scott, 116 Ga. App. 633, 158 S. E. 2d 295 (Ct. App. 1967); John Wanamaker, New York, Inc. v. Otis Elevator Co., 228 N. Y. 192, 126 N. E. 718 (Ct. App. 1920); Pontiac Mut. County Fire & Lighting Ins. Co., v. Shiebley, 279 Ill. 118, 116 N. E. 644 (Sup. Ct. 1917); Cary v. Phoenix Ins. Co., 83 Conn. 690, 78 A. 426 (Sup. Ct. Err. 1910).

More recently the Supreme Court of Arkansas in Courtney v. Birdsong, 437 S. W. 2d 238 (1969) came to the same conclusion, although a prior Arkansas decision in Washington Fire & Marine Ins. Co. v. Hammett, 237 Ark. 954, 377 S. W. 2d 811 (Sup. Ct. 1964) seems to have come to an opposite result. These two decisons are probably distinguishable, however, because the court in Courtney based its decision on an express agreement to repay executed by the insured to the insurer.

Generally, the cases espousing the Pennsylvania view base their holding on the lack of a contractual relationship between the attorney and the subrogated insurance company.

The opposite view, to the effect that reimbursement of the insurer under a subrogation right should be made after the deduction of a pro rata share of the reasonable cost of the insured’s efforts to recover its claim, is best expressed in United Services Automobile Association v. Hills, 172 Neb. 128, 109 N. W. 2d 174, 2 A. L. R. 3d 1422 (Sup. Ct. 1961). There the Nebraska Supreme Court stated:

*> * * Where the holder of the subrogation right does not come into the action, whether he refuses to do so or acquiesces in the plaintiff’s action, but accepts the avails of the litigation, he should be subjected to his proportionate share of the expenses thereof, including attorney’s fees. [172 Neb. at 133, 109 N. W. 2d at 2 A. L. R. 3d, at 1428]

The rule laid down in the Nebraska ease is said to be the majority rule. 44 Am. Jur. 2d, Insurance, § 1846, at 773. Jurisdictions supporting this view include Washington Fire & Marine Ins. Co. v. Hammett, (Ark.) above; Forsyth v. Southern Bell Tel. and Tel. Company, 162 So. 2d 916 (Fla. Ct. App. 1964); North River Ins. Co. v. McKenzie, 261 Ala. 353, 74 So. 2d 599, 51 A. L. R. 2d 687 (Sup. Ct. 1954); General Exchange Ins. Corporation v. Driscoll, 315 Mass. 360, 52 N. E. 2d 970, 973 (Sup. Jud. Ct. 1944); Svea Assur. Co. of Gothenburg, Sweden v. Packham, 92 Md. 464, 48 A. 359 (1901). See also, Annotations 2 A. L. R. 3d 1441, 1443 (1965); 51 A. L. R. 2d 697, 719 (1957).

The insurance contract before us contains no provision for fees and costs in its provisions dealing with subrogation. The company’s rights, as set forth in the contract, read:

In the event of any [medical] payment under coverage C of this policy the Company shall be subrogated to all the rights of recovery therefor which the insured person or anyone receiving such payment may have against any person or organization and such person shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. * s'

It is elementary that the juristic effect of a contract is governed by the expressed intention of the parties. In the absence of any overriding public policy, “it is the function of a court to enforce it as written and not to make a better contract for either of the parties.” Kampf v. Franklin Life Ins. Co., 33 N. J. 36, 43 (1960).

Public policy here, however, is in equipoise. Home clearly never had an obligation to sue Kovacs; it did not employ plaintiffs’ attorney, participate in the proceedings or settlement, or specifically direct plaintiffs’ attorney to represent it in the Kovacs matter. Principles of the attorney-client relationship thus would appear to militate against charging Home. This is the view espoused by the minority rule.

In the absence of statute, rule of court or contract, the mere accrual of benefits to a third party does fiot entitle an attorney to recover any compensation from those benefited. Cohen v. Fair Lawn Dairies, Inc., 86 N. J. Super. 206, 212 (App. Div. 1965), aff’d 44 N. J. 450 (1965); 7 Am. Jur. 2d, Attorneys at Law, § 205, at 166; Annotation 78 A. L. R. 2d 318, 324 (1961). Hence the reference by plaintiffs to the workmen’s compensation statute is inapposite. However, had Home caused the Klaciks to incur expense in settlement or had there been a default in an obligation to defend the Klaciks, public policy would dictate the imposition of legal fees. Verhagen v. Platt, 1 N. J. 85, 92 (1948); Gerhardt v. Continental Ins. Co., 48 N. J. 291, 300 (1966).

We conclude that the more equitable rule is that espoused by the majority in United Services Automobile Association v. Hills, above. Clearly, had Home decided to insttiute its own action, or intervene in the action instituted by plaintiffs against Kovacs, it would have been required to incur expenses including an attorney’s fee for such action. To establish an artificial rule which would provide an insurer with the right to sit back and permit its insured to proceed with an action, expecting to share in the avails of that proceeding without the burden of any of the expense, occurs to us to be anomalous.

The arrangement between plaintiffs and their attorney was for him to receive one-third of any recovery obtained from Kovacs. The one-third counsel fee should be figured on the gross recovery, including the amount to be reimbursed to Home Insurance Company. Thus, Home’s reimbursement will be reduced by one-third.

Plaintiffs have also requested that the amount to be reimbursed to Home be further reduced by the sum of $200 for expenses. The record is barren of any basis for the amount asked for expenses and, accordingly, we cannot pass on their reasonableness. We remand to the trial court for ascertainment of the proportion of expenses to be paid out of the amount to be reimbursed to Home, which proportion should not exceed the amount which the gross reimbursement to he paid to Home bears to the total recovery.

Eeversed and remanded for further proceedings in conformity with this opinion.


author: Herbert, J. S. C.

text:
    NEW JERSEY HIGHWAY AUTHORITY, A BODY CORPORATE AND POLITIC CREATED AND EXISTING UNDER AND BY VIRTUE OF CHAPTER 16 OF THE LAWS OF 1952, AS AMENDED AND SUPPLEMENTED; FIDELITY UNION TRUST COMPANY, A BANKING CORPORATION OF THE STATE OF NEW JERSEY, AS TRUSTEE UNDER THE GENERAL BOND RESOLUTION OF THE NEW JERSEY HIGHWAY AUTHORITY ADOPTED JULY 8, 1953, AS SUPPLEMENTED; AND FIRST NATIONAL STATE BANK OF NEW JERSEY, A NATIONAL BANKING ASSOCIATION, AS TRUSTEE UNDER THE JUNIOR BOND RESOLUTION OF THE NEW JERSEY HIGHWAY AUTHORITY ADOPTED JULY 7, 1962, AS SUPPLEMENTED, PLAINTIFFS, v. ARTHUR J. SILLS, ATTORNEY GENERAL OF THE STATE OF NEW JERSEY, DEFENDANT.
    Superior Court of New Jersey Chancery Division
    Decided July 29, 1970.

      Mr. Theodore W. Geiser for plaintiff Pew Jersey Highway Authority (Messrs. Pindar, McFlroy, Connell, Foley & Geiser, attorneys).

      Mr. Dickinson B. Debevoise for plaintiff Fidelity Union Trust Company, trustee (Messrs. R Biker, Danzig, Scherer & Brown, attorneys).

      Mr. John J. McDonough for plaintiff First National State Bank of Pew Jersey, trustee.

      Mr. Philip S. Carchman, Deputy Attorney General, for defendant.

      Mr. J. Leonard Hornstein for Intervenors-Defendants 78th Division (Training) United States Army Reserve and National Guard Association of New Jersey (Messrs. Hornstein & Hornstein, attorneys).
   Herbert, J. S. C.

This supplements an earlier opinion dated March 25, 1970 which is reported in 109 N. J. Super. 424 (Ch. Div. 1970). After that opinion was published, but before any judgment was entered, application was made by 78th Division (Training) United States Army Reserve and by Patonal Guard Association of Pew Jersey to intervene for the purpose of defending against plaintiffs’ contentions that Chapters 352 and 414 of the Laws of 1968 are unconstitutional. Over objections intervention was allowed, the order of intervention being dated April 16, 1970 and providing for a final hearing on the merits on May 7, 1970.

My recollection is that nothing took place on May 7th except that an adjournment to a later date was arranged. Either on May 7th or on a later date the attorney for the intervenors as well as counsel for the other parties agreed that there was no need to hear the testimony of any witnesses. It was agreed further that written material on behalf of the intervenors would be served and filed. That has now been done in the form of letters dated June 24, 1970 and July 22, 1970. Both of these are, in effect, informal briefs which develop arguments and cite authorities in support of intervenors’ position. Although the letter of June 24th mentioned a failure to furnish information about total Garden State Parkway revenues for 1969, total bond service costs for 1969 and the amount of alleged loss of tolls in the same year resulting from free passage by National Guard and Army Reserve personnel, such information was furnished promptly thereafter. It is now my understanding that I have before me everything that any party desires to submit.

Total Parkway revenues for 1969 were: gross, $46,942,-171.00; net, $33,312,885.00. Total bond service costs for that year were $17,816,740.00. As to toll-free passage, 99,546 tickets or passes were used by National Guardsmen and Army Reservists from February to December of 1969 indicating, at a value of 25^ each, approximately $25,000.00 of revenue lost during that period of eleven months. In a full year, free passage at this rate of use would result in loss of approximately $27,300.00 if the likely assumption is made that no appreciable number of guardsmen and reservists would cease to drive on the Parkway because of a requirement that they pay for passage.

There is no need, however, to determine with accuracy, or even estimate with great care, the diminution of revenue which has resulted, and would result in the future, from use of the toll-free privileges provided by the two statutes in question. Whatever the precise figures, the diminution is certainly very small when contrasted with total revenues and with the margin of about $15,500,000.00 left from net revenues in 1969 after providing for bond service costs. I agree with one basic premise of intervenor’s argument; I cannot foresee any possibility that toll-free passage by guardsmen and reservists as provided in the two statutes will ever cause a default on bonds now outstanding or will ever create a situation which might threaten a default. However, the possibility of an early call is part of a bondholder’s contract. The difference between having and not having $27,000 a year will not cause a default but when viewed as loss of the means to retire bonds each year, by call or open-market purchase, the impact of the statutes becomes more important.

Intervenors contend that the relatively small diminution in tolls caused by free trips on the Parkway as provided for in Chapters 352 and 414 of the Laws of 1968 does not make those statutes unconstitutional. The case on which they principally rely is City of El Paso v. Simmons, 379 U. S. 497, 85 S. Ct. 577, 13 L. Ed. 2d 446 (1965) rehearing denied 380 U. S. 926, 85 S. Ct. 879, 13 L. Ed. 2d 813 (1965). That case dealt with an application of the contract clause of the Federal Constitution. In my earlier opinion, without having had the benefit of intervenors’ arguments, I ruled that the two statutes in question were in conflict wth the contract clauses of the Federal and New Jersey Constitutions.

In addition to City of El Paso these cases have been cited by intervenors: State v. Sutton, 83 N. J. L. 46 (Sup. Ct. 1913), affd. 87 N. J. L. 192 (E. & A. 1915); Public Service Railway Co. v. Board of Public Utility Commissioners, 89 N. J. L. 24 (Sup. Ct. 1916); O’Gorman & Young v. Phoenix Assurance Co., 105 N. J. L. 642 (E. & A. 1929); City of Newark v. Public Service Co-Ordinated Transport, 9 Misc. 722 (Sup. Ct. 1931), affd. 109 N. J. L. 270 (E. & A. 1932); Hourigan v. North Bergen, 113 N. J. L. 143 (E. & A. 1934); State Board of Milk Control v. Newark Mills Co., 118 N. J. Eq. 504 (E. & A. 1934); In re North Jersey Title Insur ance Co., 120 N. J. Eq. 148 (Ch. Div. 1936); Bucsi v. Longworth Building & Loan Assn., 119 N. J. L. 120 (E. & A. 1937); Faitoute Iron & Steel Co. v. City of Asbury Park, 127 N. J. L. 239 (E. & A. 1941); Veix v. Sixth Ward Building & Loan Assoc. of Newark, 310 U. S. 32, 60 S. Ct. 792, 84 L. Ed. 1061 (1940); Jamouneau v. Harner, 16 N. J. 500 (1954), and Ohlson v. Phillips, 304 F. Supp. 1152 (D. C. 1969). A number oí them, though dealing with questions of constitutionality, did not in any way involve the subject of contract impairment; and in that class I place State v. Sutton, Public Service Railway Co., City of Newark v. Public Service, State Board of Milk Control and Jamouneau, supra. Some, if not all of the others in the list above, as well as City of El Paso, supra show that in some situations legislation which represents a valid exercise of police power has been held to be constitutional in spite of resulting impairment of contract obligations.

In City of El Paso v. Simmons, supra, predecessors of Simmons had contracted in 1910 to buy school lands from the State of Texas. The law at the time provided that in the event of any declaration of forfeiture for non-payment of interest the purchasers or their assignees might on written request have their claims reinstated at any time by paying into the state treasury the full amount of interest due on the claim up to the date of reinstatement. In 1941 the statute was amended to provide that within five years after a declaration of forfeiture the right to reinstate might be exercised, but not thereafter. A forfeiture was declared by the State in 1947, followed more than five years later by an application for reinstatement on the part of Simmons, who had taken quitclaim deeds to the lands. The application was rejected as too late and in 1955 Texas undertook to sell to the City of El Paso. The Supreme Court, reversing the Court of Appeals which in turn had reversed the District Court, held the 1941 legislation, with its five-year limit on the right to reinstate, constitutional and that the City owned the property and Simmons had no claim to it.

In his opinion for the majority Mr. Justice White said:

We do not pause to consider further whether the Court of Appeals correctly ascertained the Texas law at the time these contracts were made, or to chart again the dividing line under federal law between “remedy” and “obligation,” or to determine the extent to which this line is controlled by state court decisions, decisions often rendered in contexts not involving Contract Clause considerations. For it is not every modification of a contractual promise that impairs the obligation of contract under federal law, no more than it is every alteration of existing remedies that violates the Contract Clause. Stephenson v. Binford, 287 U. S. 251, 276, 53 S. Ct. 181, 188; 77 L. Ed. 288; Stone v. Mississippi, 101 U. S. 814, 819, 25 L. Ed. 1079; Manigault v. Springs, 199 U. S. 473, 26 S. Ct. 127, 50 L. Ed. 274. Assuming the provision for reinstatement after default to be part of the State’s obligation, we do not think its modification by a five-year statute of repose contravenes the Contract Clause.
The decisions “put it beyond question that the prohibition is not an absolute one and is not to be read with literal exactness like a mathematical formula,” as Chief Justice Hughes said in Home Building & Loan Assn. v. Blaisdell, 290 U. S. 398, 428, 54 S. Ct. 231, 236. The Blaisdell opinion, which amounted to a comprehensive restatement of the principles underlying the application of the Contract Clause, makes it quite clear that “[n]ot only is the constitutional provision qualified by the measure of control which the State retains over remedial processes, but the State also continues to possess authority, to safeguard the vital interests of its people. It does not matter that legislation appropriate to that end ‘has the result of modifying or abrogating contracts already in effect.’ Stephenson v. Binford, 287 U. S. 251, 276 [53 S. Ct. 181, 189], 77 L. Ed. 288, 301. Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order. * * * This principle of harmonizing the constitutional prohibition with the necessary residuum of state power has had progressive recognition in the decisions of this Court.” 290 U. S., at 434-435, 54 S. C., at 238-239, 78 L. Ed. at 426, 427 [379 U. S. 506 et seq., 85 S. Ct. 582]

And at the conclusion of his discussion of general principles he said at p. 509, 85 S. Gt. at page 584. "But we think the objects of the Texas statute make abundantly clear that it impairs no protected right under the Contract Clause.”

What follows is an entire section of the opinion devoted to a summary of Texas policy and practices with regard to public lands, the difficulties created for the state and its citizens by thousands of outstanding and delinquent land contracts and the widespread and urgent need for corrective legislation.

Our New Jersey cases appear to be consistent with the general principles stated in City of El Paso, supra. Hourigan v. North Bergen Township, supra, may be mentioned particularly. The legislation there in question had been passed for the relief of municipalities which, during the great depression, were unable to collect taxes and get funds with which to meet their obligations. It was held to be a valid exercise of the police power and hence not an unconstitutional conflict with the contract clauses of federal and state constitutions. During the course of its opinion the Court said:

It is a well established doctrine that the interdiction of statutes impairing the obligation of contracts does not prevent the state from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts entered into between individuals may thereby be affected. This power, which in its various ramifications is known as the police power, is an exercise of the sovereign right of the government to protect the lives, health, morals, comfort, and general welfare of the people, and is paramount to any rights under contracts between individuals. [113 N. J. L. at 140]

I have no doubt that if the statutes here in question are allowed to stand, they will impair tile obligation of the contract with bondholders and their trustees. The position of every bondholder will have deteriorated to some extent. For a strong statement that the amount and extent of impairment is immaterial sec 16 Am. Jur. 2d “Constitutional Law” § 446 (1964), where many authorities are listed. The question appears to narrow down to this: Are the statutes such a valid exercise of the state’s police power as to represent a permissible impairment?

The difficulty of defining the term “police power” hardly calls for comment. Many of the attempts at definition are mentioned in 16 Am. Jur. 2d, “Constitutional Law” § 261 and 262 (1964), and footnotes. However, I think it unnecessary to consider whether Chapters 352 and 414 of the Laws of 1968 represent an exercise of the State’s police power. Assuming that they do, they are unlike the emergency legislation of Hourigan, Faitoute Iron & Steel Co. and Veix, the statutes dealt with in all three of those cases having been passed to relieve general and severe problems of the depression years. Chapters 352 and 414 have for their primary objective the conferring of personal benefits upon Guardsmen and Army Reservists. They are not an attempt to solve an emergency problem and are not addressed to any problem of state-wide importance as was the Texas legislation considered in Cily of El Paso. The State, of course, has a legitimate interest in having members of the National Guard and Army Reserve attend training sessions as well as an interest in persuading new members to join. Perhaps some small measure of the persuasion might be the prospect of toll-free passage to and from training sessions.

Chapters 352 and 414 of the Laws of 1968 are relatively unimportant pieces of legislation. Eree passage on New Jersey toll roads for Guardsmen and Army Reservists who are going to or coming home from training sessions is not vital to them, to the plaintiffs or to anyone else. Mr. Justice Black, dissenting in City of El Paso, supra chided his colleagues of the majority with “balancing away the plain guarantee of U. S. Const. Art. I, § 10, that ‘No State shall * * * pass any * * * Law impairing the Obligation of Contracts. * * ” To do that “balancing” the majority, as noted above, pointed out the great importance to Texas of the legislation which had cut down to five years the previously unlimited right to reinstate defaulted contracts to purchase state lands. In my judgment City of El Paso will not support a holding that ordinary and relatively unimportant legislation can impair the obligation of contracts without conflicting with the constitutional prohibition against impairment, even though the degree is small or even slight. I conclude that the two statutes in question are not such products of the legislative power of the State of New Jersey that they can stand in the face uf the constitutional prohibitions against impairment of contract obligations; and that they are unconstitutional.

In the opinion (109 N. J. Super. 424) to which this is a supplement First National Bank of Boston v. Maine Turnpike Authority, 153 Me. 131, 136 A. 2d 699 (Sup. Jud. Ct. 1957) was cited and relied upon as an authority under the contract clause. Intervenors now argue that the holding of the Maine court was based primarily on the police power of the state to require public utility companies to make and pay for necessary relocations of their lines. I have re-examined the case and have not changed my view that it is a pertinent authority which supports the conclusion that Chapters 352 and 414 of the Laws of 1968 are unconstitutional. The action was one for a declaratory judgment. The earlier portion of the opinion does consider, among other things, the police power of the state over public utility installations, but the court also carefully dealt with (136 A. 2d 718, et seq.) the contract impairment problem and held the legislation before it to be unconstitutional under the contract clauses of both the Federal and Maine Constitutions. Intervenors point out that the amount of money involved, estimated at a sum not in excess of $300,000 was described by the Maine court as “very ponderable.” However, the expense of following the statute would have ended for the Maine Turnpike Authority upon completion of the Portland-Augusta extension and would not have affected the financial affairs of the Turnpike year after year as a legislative imposition of toll-free travel would have done.

Intervenors have also called attention to other states which have statutes like Chapters 352 and 414. Those states are Florida, Kentucky, Maryland and New York. It is conceded that, except in Kentucky, the statutory direction for toll-free passage was passed prior to or at the same time as the creation of the particular state’s toll roads. The Kentucky statute directing that no tolls bo charged was adopted in 1954, approximately four years after the statute authorizing the construction of the Kentucky Turnpike. However, intervenors inform me that no case has been found in which the Kentucky legislation on tolls has been ruled upon by any court. I see nothing significant for us, and certainly not conclusive, in what these other states have done.

As was said at the close of the prior opinion in this case: Chapters 352 and 414 being unconstitutional, judgment will be entered instructing plaintiff trustees as well as plaintiff Highway Authority that the provisions of the Authority’s bond resolutions are to be enforced and complied with as though those chapters had never been passed by the Legislature; and the judgment shall include a specific order to the Highway Authority to charge tolls without regard to the terms of the two statutes so that it may perform its contract obligations to its bondholders and to their trustees and thereby do its part in responding to the enforcement instructions to the trustees which will be included in the judgment.


text:
    AMERICAN CONTAINER CORP., A NEW JERSEY CORPORATION, PLAINTIFF, v. HANLEY TRUCKING CORP., A NEW JERSEY CORPORATION, DEFENDANT AND THIRD-PARTY PLAINTIFF, v. HERSCHEL TRUCKING CO., A NEW JERSEY CORPORATION, THIRD-PARTY DEFENDANT.
    Superior Court of New Jersey Chancery Division
    Decided July 31, 1970.

      Mr. Henry Farer for plaintiff (Farer & Krueger, attorneys).

      Mr. Salvatore Burgio for defendant and third-party plaintiff.

      Mr. Herbert F. Savoye, Jr. for third-party defendant.
   Herbert, J. S. C.

On March 16, 1968 Hanley Trucking Corp. arranged to purchase from Herschel Trucking Co. certain vehicles, including a used 1965 Eruehauf semi-trailer. A week later the semi-trailer was sold to American Container Corp. as a result of negotiations between American and Hanley. The purchase price of $3,800 was paid by American to Hanley; Hanley forwarded $3,500 to Herschel and retained the $300 balance. A bill of sale and certificate of legal title were given to American by Hanley. The bill of sale was written on Hanley’s stationery, signed by Hanley’s president, and it stated:

This is to certify that we have this date sold 1-1965 Frehauf [sic] semi trailer to your company and have received your check and said unit is paid in full.

However, legal title on the certificate was still in the name of Herschel, which had endorsed the document in blank. Hanley had never taken physical possession of the semitrailer, but delivery was made nevertheless by Hanley from Herschel directly to American.

American enjoyed full possession and use of the semitrailer for 16 months until July 33, 1969, when the New Jersey State Police impounded it under the authorization of N. J. S. A. 39:5-47. That statute provides in part:

. The commissioner may authorize the seizure of a motor vehicle operated over the highways of this state when he has reason to believe that the motor vehicle has been stolen or is otherwise being operated under suspicious circumstances and may retain it in the name of the department until such time as the identity of ownership is established, whereupon he shall order the release of the motor vehicle to its owner.
After the expiration of ninety days from the date the motor vehicle came into the possession of the commissioner by seizure or otherwise, he shall sell it at public sale, upon notice * * *.
Upon the sale of the motor vehicle all claims for interest therein shall be forever barred and the proceeds realized therefrom shall become the sole property of the state, * * *.

Less than two weeks after the seizure, American notified Hanley that it desired to rescind the contract of sale between them. American offered to assign to Hanley the receipt given for the semi-trailer by the State Police, but Hanley refused to return the $2,800 purchase price. American thereafter insttiuted this action against Hanley for rescission. Hanley in turn filed a third party complaint against Herschel, alleging that if anyone is liable to American, it is Herschel. Hanley’s third party complaint was filed more than 90 days after the semi-trailer was impounded; no allegations were made or evidence adduced of any earlier demands by Hanley on Herschel. Timely answers to both the complaint and the third party complaint were filed in due course.

Now American, Hanley, and Herschel have all moved for summary judgment. The parties having conceded at oral argument that there is no genuine dispute as to any of the material facts set forth above, this case is an appropriate one for partial summary disposition.

American contends that it bought the semi-trailer from Hanley, who impliedly, but falsely, warranted and represented good title. Hanley denies that it sold the semi-trailer to American and that it warranted good title. Rather, says Hanley, Herschel sold the semi-trailer directly to American and warranted good title to both American and Hanley. Herschel asserts not only that it never warranted good title, but also that in fact good title was conveyed and the seizure of the semi-trailer improper. Moreover, Herschel argues that rescission is an inappropriate remedy here, where American cannot tender the semi-trailer itself, bnt merely the police receipt.

A “sale” is defined by the Uniform Commercial Code as “the passing of \utle from the seller to the buyer for a price.” N. J. S. 12A:2-106(1). “‘Seller’ means a person who sells or contracts to sell goods.” N. J. S. 12A:2-103(d). Black’s Law Dictionary says a “sale” is “a contract between two parties called, respectively, the ‘seller’ (or vendor) and the ‘buyer,’ (or purchaser), by which the former, in consideration of the payment or promise of payment of a certain price in money, transfers to the latter the title and the possession of property.” These are simply formalized statements of principles known to every layman: A sale is a transfer of goods for consideration, and the seller is generally the party that receives the consideration and effects the transfer.

In this case, if it be assumed that there was any title or participating interest in the allegedly stolen semi-trailer which could be the subject of a sale, there is no question but that there was a sale to American. I think it equally clear that Hanley, not Herschel, was the seller. Hanley was the equitable owner of the vehicle by virtue of its contract with Herschel; moreover, it held the instrument of legal title which, endorsed in blank by Herschel, enabled it to put the registration of title in its own name at will. It was Hanley that arranged the sale to American, received the purchase price, conveyed title and a bill of sale (which expressly acknowledged its status as seller), and effected delivery.

Herschel, on the other hand, had no part in the transaction by which American acquired the semi-trailer. Rather, Herschel was the seller to Hanley in the earlier — and separate -- sale by which Hanley had acquired the semitrailer for itself at a cost of $2,500. Eor an analogous case, see Pope v. Ferguson, 82 N. J. L. 566 (E. & A. 1912). There plaintiff had contracted, first, to buy certain iron plates from defendant and, second, to sell them to B. Nicoll & Co. for a profit. Plaintiff had also arranged for all deliveries to be made by defendant directly to B. Nieoll & Co., and this had been done for a while until defendant breached its contract. Plaintiff then brought an action for damages. Defendant unsuccessfully sought from the trial court a nonsuit or a directed verdict on the ground that.

* * * there had been an absolute assignment by the plaintiff of his contract with the defendant to B. Nieoll & Go., and that consequently any right of action which had resulted from the breach of the contract by the defendant was in B. Nieoll & Co., and not in the plaintiff. [82 N. J. L. at 569]

Although reversing on other grounds, the Court of Appeals specifically agreed with the lower court’s rejection of defendant’s claim of an assignment:

The agreement between the plaintiff and B. Nieoll & Co., which has already been recited, did not constitute an assignment of the defendant’s contract with the plaintiff, but was a resale to B. Nieoll & Co. of the plates purchased by the plaintiff from the defendant [82 N. J. L. at 569]

Hanley’s assertions of caveat emptor notwithstanding, there can be no doubt that Hanley impliedly warranted good title when it sold the semi-trailer to American. By the same token, Hanley had received from Herschel an implied warranty of good title with its acquisition of the vehicle. The Uniform Commercial Code provides that in every contract of sale there is implied a warranty of good title unless such warranty is specifically excluded by the language or circumstances of the agreement:

(1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that
(a) the title conveyed shall be good, and its transfer rightful; and
(b) the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.
(2) A warranty under subsection (1) will be excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that be is purporting to sell only such right or title as he or á third person may have. [A. J. S. 12A:2-312]

The same principle has long been recognized under the common law. Stein v. Scarpa, 96 N. J. L. 86 (Sup. Ct. 1921); Gould v. Bourgeois, 51 N. J. L. 361 (Sup. Ct. 1889).

The facts of this case demonstrate no specific exclusions, and the general rule implying warranties of good title applies.

Hersehel argues that good title was in fact conveyed to Hanley, and then to American. This appears doubtful in light of the certification filed by Thomas Cornelissen, a detective with the New Jersey State Police. Cornelissen states that when he examined the semi-trailer, its serial plate had been removed and the die-stamped frame serial number had been ground off. Moreover, the title certificate was invalid, since the serial number it listed was a number used for trailers manufactured in years prior to 1965 and could not have been the proper number for this 1965 vehicle.

HerschePs claim that good title was conveyed would, if sustainable, not only negate any breach of warranty, but also indicate that return of the vehicle could probably have been secured by American within the time (90 days after seizure) allowed by N. J. S. A. 39:5-47.

Other arguments might also have been made within the 90-day period to contest the validity of the seizure by the State Police. Challenge might have been made as to the constitutionality of the statute, a startling and confiscatory provision which ignores the bona fide purchaser for value whom the law is so careful to protect in other situations. But Cf. Kutner Buick, Inc. v. Strelecki, 111 N. J. Super. 89 (Ch. Div. 1970). Or it might have been argued that a semitrailer is not a “motor vehicle” within the language and intendment of the statute.

However, I find it unnecessary to rule on these various questions. I think the relevant one is not whether the semitrailer was properly taken and retained by the State Police, but on whom the burden of contesting the police action should have rested.

The purchaser of goods warranted as to title has a right to rely on the fact that he will not be required, at some later time, to enter into a contest over the validity of his ownership. The mere easting of a substantial shadow over his title, regardless of the ultimate outcome, is sufficient to violate a warranty of good title. The policy advanced here has found expression in the past in cases where courts of equity have refused to order specific performance of contracts for the sale of land. See, e. g., Tillotson v. Gesner, 33 N. J. Eq. 313 (E. & A. 1880); Dobbs v. Norcross, 24 N. J. Eq. 327 (Ch. 1874). Justice Scudder said in Tillotson:

The true rule is stated in 3 Pars, on Con. (3th ed.)* 380, that if the character of the title be doubtful, although the court were able to come to the conclusion that, on the whole, a title could be made that would not probably be overthrown, this would not be good title enough; for the court [sic] have no right to say that their conclusion, or their opinion, would bind the whole world, and prevent an assault on the title. The purchaser should have a title which shall enable him not only to hold his land, but to hold it in peace; and if he -wishes to sell it, to be reasonably sure that no flaw or doubt will come up to disturb its marketable value. (33 N. J. Eq. at 320-327)

In Dobbs, the Chancellor wrote;

Every purchaser of land has a right to demand a title which shall put him in all reasonable security, and which shall protect him from anxiety, lest annoying, if not successful suits be brought against him, and probably take from him or Ms representatives, land upon which money was invested. He should have a title which shall enable him not only to hold liis land, but to hold it in peace; and if he wishes to sell it, to be reasonably sure that no flaw or doubt will come up to disturb its marketable value (24 N. J. Eq. at 331)

The quoted language was used about real estate and specific performance, but I think it oilers a fair description of the protection a buyer obtains for himself when he purchases goods with a warranty of good title. That a buyer who gives notice to his seller may be protected even when he surrenders the chattel without much struggle against a weak adverse claim is suggested in Williston On Sales, Rev. ed. (1948), Vol. 1, § 221, p. 569 where the text reads:

The burden is, of course, upon the buyer to establish that the seller had no title to the goods, and if the goods have been surrendered unreasonably by the buyer to an adverse claimant, this is no proof of the original seller’s defect of title in an action between him and the buyer, unless the seller was requested to defend the action against the adverse claimant or at least had notice of that action. [emphasis added]

The New Jersey Study Comment to N. J. S. 12A:2-312 quotes the following language from Hawkland, Sales and Bulle Sales Under the Uniform Commercial Code, 40 (1958) :

Section 2-312 does not mention the warranty of quiet possession, but it seems certain that the section contemplates that disturbance of quiet possession is one way in which a breach of warranty of title may be established.

This interpretation renders the current statute consistent with N. J. S. A. 46:30-19 of the now-repealed Uniform Sale of Goods Law. That statute provided in part:

46:30-19. Implied warranties of title

In a contract to sell or a sale, unless a contrary intention appears, there is: * * *.
(2) An implied warranty that the buyer shall have and enjoy quiet possession of the goods as against any lawful claims existing at the time of the sale.

Quiet possession is not enjoyed by a buyer whose purchase has been seized by the State Police as a stolen vehicle.

Breach of a warranty of good title results in a failure of consideration and generally gives the purchaser the right to rescind the transaction. Stein v. Scarpa, supra, is a ease very close to the one at hand. There the plaintiff sought to rescind his purchase of a car on the ground that defendant had conveyed defective title. The car's original serial number had been obliterated and a new number substituted for it. In addition, the transfer of title to the plaintiff had not been in compliance with statutory requirements. The Supreme Court upheld a lower court decision for plaintiff, saying:

The sale oí goods in possession implied a warranty of title both at common law and under the Sales Act, and when the title failed the consideration failed with it, the bargain became nudum pactum and rescission then became the legal right of the vendee. 96 N. J. L. at 88.

In Stein v. Scarpa, as here, the parties before the court were all innocent of any illegality in their transaction. The opinion does not indicate how long plaintiff there had possession of the car prior to discovery of the defect in title and prior to plaintiff’s first demand for rescission, but is clear that plaintiff returned actual possession of the car to defendant when he made his demand for return of the purchase price.

American elected to rescind almost immediately after receiving notice of the defective title, although that was not until 16 months after acquisition of the semi-trailer from Hanlejc While delay in the rescission of a contract is evidence of an election to treat the contract as valid — Jones v. Gabrielan, 52 N. J. Super. 563, 576 (App. Div. 1958) and cases cited — the duty to rescind does not first arise until discovery of the grounds for rescission. City of Reading v. Rae, 106 F. 2d 458, 462-63 (3rd Cir. 1939), cert. den. 308 U. S. 607, 60 S. Ct. 145, 84 L. Ed. 508 (1939); Passaic Valley Sewerage Commissioners v. Holbrook, Cabot & Rollins Corp., 6 F. 2d 721, 724-725 (3rd Cir. 1925), cert. den. 269 U. S. 582, 46 S. Ct. 107, 70 L. Ed. 423 (1925); Conlan v. Roemer, 52 N. J. L. 53, 58-59 (Sup. Ct. 1889); Dennis v. Jones, 44 N. J. Eq. 513, 516 (E. & A. 1888). American’s election to rescind was promptly made after discovery of the ground for rescission. Moreover, it was well within the time allowed by N. J. S. A. 39:5-47 for an assertion of ownership to the seized vehicle, so that Hanley could not have been prejudiced by any delay had it accepted rescission.

American, of course, did not and could not tender return of the semi-trailer to Hanley, as the vehicle was in the hands of the police. Was American’s tender of the receipt given by the police adequate to justify rescission? The law is clear that a rescission contemplates a return to status quo ante. Medivox Productions, Inc. v. Hoffmann-LaRoche, Inc., 107 N. J. Super. 47, 75-76 (Law Div. 1969); Ray v. Beneficial Finance Co., 92 N. J. Super. 519, 539 (Ch. 1966); MacFadden v. MacFadden, 49 N. J. Super. 356, 363 (App. Div. 1958); Panco v. Rogers, 19 N. J. Super. 12, 18 (Ch. 1952). But this is not an absolute requirement. Doughten v. Camden Building and Loan Association, 41 N. J. Eq. 556, 561 (E. & A. 1886); Byard v. Holmes, 33 N. J. L. 119, 127 (Sup. Ct. 1868). In Doughten, Justice Scudder said:

It is a well-settled principle of law and equity that a party cannot rescind a contract by his own will, and at the same time keep possession of the consideration, in whole or in part, which he has received under it. So far as it is practicable, he must put the other party in statu quo before he can exercise his right of rescission. The rule is that there shall be “prompt repudiation and restoration, as far as possible." (emphasis added) (41 N. J. Eq. at 561)

I am satisfied, under the circumstances, that American’s inability to return the semi-trailer should not operate as a bar to rescission. Hanley never had perfect title. Possession of the vehicle, whether by Herschel or by Hanley or by American, was always subject to the possibility of seizure by the police. Once the vehicle was seized in fact, and for 90 days thereafter, the police receipt represented title equivalent in quality to that originally conveyed from Hanley to American. With the timely notice given by American, Hanley could have sought to establish the validity of its ownership and to secure repossession of the vehicle. That Hanley did not do so cannot weigh against American in its suit for rescission.

One other aspect of American’s claim of rescission must be considered. Eor 16 months prior to the seizure of the semi-trailer, American had full possession and use of the vehicle, while Hanley did not. During this period the semitrailer presumably depreciated somewhat in value, though I recall that the parties agreed at oral argument that depreciation of this kind of an asset would not be especially significant in 16 months. At any rate, it can fairly be said that some value was gained by American and lost by Hanley between the time of the sale and the time that the vehicle was impounded by the police. This value, whatever it may be, must be returned to Hanley by American if there is to be a rescission.

After part performance a party is not entitled to rescind without returning or tendering the consideration or benefits received. Medivox Productions, Inc. v. Hoffmann-LaRoche, Inc., supra, 107 N. J. Super, at 76.

An amount representing reasonable value of the possessory interest American got and enjoyed between the date of sale and the date of police seizure will have to be credited against the $2,800.00, the price paid for a full and valid title. At oral argument I was informed by counsel that if basic rights and liabilities were determined, they would probably be able to agree upon this amount; if not, there will have to be a hearing so that an appropriate figure can he fixed. After the credit is agreed upon or determined, and is deducted from the $2,800.00 price, then Hanley will have to pay American the difference together with interest at 6% on that difference from the date of Hanley’s sale to American.

As.a part of the transaction of rescission American should deliver to Hanley the police receipt and whatever purported certificate or certificates of title American may hold.

It also follows from what has been said that Hanley is not entitled to rescission of the contract by which it purchased the semi-trailer from Herschel. Unlike American, Hanley did not give timely notice of rescission of its contract of purchase, and so Hanley must be held to have elected to treat the contract as valid. Jones v. Gabrielan, supra. Having allowed the 90 days provided by N. J. S. A. 39:5-47 to expire without notification to Hersehel, Hanley deprived Hersehel of an opportunity to try to establish ownership and reacquire possession of the semi-trailer, so that Hanley could not thereafter restore Hersehel to the status quo ante.

Hanley nonetheless has an action for damages, against Hersehel, based on breach of contract. Much if not all of what has been said above concerning warranties of title applies to this aspect of the case. The amount of damages is not ascertainable at this juncture. Hersehel may have a valid claim for a setoff, due to Hanley’s failure to have mitigated damages by preserving Herschel’s right to redeem the semi-trailer from the police. To evaluate this setoff necessarily requires evidence as to the likelihood that Hersehel might or might not have succeeded in reclaiming the vehicle had it had the chance.

• American’s motion for summary judgment rescinding its contract with Hanley is granted upon the conditions specified above. Hanley’s motion for summary judgment against American and Hersehel is denied, except that summary judgment is granted adjudicating Hersehel liable to Hanley in damages for breach of contract in an amount to be determined. Herschel’s motion for summary judgment against Hanley is denied as to Hanley’s claim for damages and granted as to rescission. The parties are to be allowed thirty days to work out their differences with regard to the two remaining issues in this case, namely (1) the value to American of 16 months’ possession and use of the semitrailer and (2) the amount of damages suffered by Hanley as a result of Herschel’s breach of contract. If the issues remain unresolved at the end of the allotted time, then this case is to be set down for hearing at the request of any one of the parties.


author: Giuliano, A. J. S. C.

text:
    ELISE SCHLOSSER, AN INFANT BY HER GUARDIAN AD LITEM, DON SCHLOSSER AND DON SCHLOSSER AND JEANNE SCHLOSSER, PLAINTIFFS, v. ARTHUR KRAGEN, AYILLIAM SPENCER AND THE HOSPITAL CENTER AT ORANGE, ORANGE MEMORIAL HOSPITAL, A CORPORATION OF THE STATE OF NEW JERSEY, DEFENDANTS.
    Superior Court of New Jersey Law Division
    Decided July 7, 1970.

      Mr. Ralph G. Conte for plaintiffs, (Messrs. Freeman & Bass, attorneys).

      Mr. William D. Jones for defendant William Spencer (Messrs. Stryker, Tams & Bill, attorneys).

      Mr. Milton Gurny for defendant, Arthur Kragen, (Messrs. Zucker, Lowenstein, Gurny & Zucker, attorneys).

      Mr. Wilbur A. Stevens for defendant The Hospital Center at Orange, Orange Memorial Hospital (Messrs. Stevens and Mathias, attorneys).
   Giuliano, A. J. S. C.

This is a medical malpractice action brought by infant plaintiff Elise Schlosser and her mother Jeanne Schlosser, who had been the patient of defendant Dr. Arthur Kragen prior and subsequent to the infant’s birth. The suit is against Dr. Kragen, The Hospital Center at Orange and Dr. William Spencer, a member of the staff at The Hospital Center at Orange. The complaint, filed on December 7, 1966, alleges injury to plaintiffs resulting from the pre-natal and post-natal care given by defendants during the late Spring of 1965.

This matter comes before the court on a motion to restore this action to the active trial list. The complaint was dismissed on October 18, 1967 for failure to answer interrogatories pursuant to then R. R. 4:23—6(e) [now R. 4:23-5 (a)].

On December 9, 1969 the attorneys for plaintiffs filed a notice of motion returnable December 19, 1969 to restore this action to the active trial list. The motion to restore was filed by the attorneys for plaintiffs more than 25 months after the order of dismissal. At the argument of the motion it was represented to the court that the main claim in the action was by an infant. The representation was made by Irwin L. Fachesr, attorney for defendant Dr. Arthur Kragen. This representation was not disputed by the attorney for plaintiffs. Upon that representation this court denied the application to restore the action to the active trial list since the infant could not have been prejudiced by the statute of limitations.

Subsequently, the attorneys for plaintiffs became aware that due to their inadvertence they had failed to advise the court at the hearing of December 19, 1969 that, in. addition to the infant’s claim, there was also a claim on behalf of an adult plaintiff. Plaintiffs’ attorneys filed a new complaint on behalf of the adult and infant claimants. Defendants then moved to dismiss the claims of the adult plaintiffs on the ground that the claims were barred by the statute of limitations. Upon receipt of the motion to dismiss the adult claims, the attorneys for plaintiffs filed this motion to restore the original action to the active trial list. The motion to dismiss the claims of the adult plaintiffs has been adjourned pending the decision of his motion to restore the original action to the active trial list.

Preliminarily, it is to be noted that due to the confusion of the attorneys as to plaintiffs’ respective claims, the court will consider this motion as though it were the original motion to restore filed on December 9, 1969. The court will consider the affidavits filed by all parties in connection with the first motion and the affidavits and briefs filed in connection with the subsequent motion to restore which was returnable April 17, 1970.

The original court rule promulgated pursuant to the Constitution of 1947 providing for sanctions to be imposed for failure to answer interrogatories was Buie 3:37-4. On September 9, 1953 this rule became R. R. 4:27-4 [Now R. 4:23-4]. With certain amendments which are not relevant to the issues presently before this court, R. R. 4:27-4 remained in its original form until it was amended on August 13, 1964 to be effective September 9, 1964. The effects of the 1964 amendment will be discussed later in this opinion.

R. R. 4:27-4, adopted on September 9, 1953, provided:

If a party or an officer, director or managing or authorized agent of a party wilfully fails to appear before the officer within this State who is to take his deposition, after being served with a proper notice, or fails to serve answers to interrogatories submitted under Rule 4:23 after proper service of such interrogatories, the court on motion and notice may strike out all or any part of any pleading of that party, or dismiss the action or proceeding or any part thereof, or enter a judgment by default against that party, or take such other action as it deems advisable.

The implementation of this rule is discussed in Lang v. Morgan’s Home Equipment Corp., 6 N. J. 333 (1951). That case involved the failure of a defendant to make discovery. On plaintiffs’ application to. suppress the answer and dismiss the counter-claim, the trial court entered an order compelling defendant to make discovery. Under the rules then in effect, it .was necessary for the aggrieved party to make formal application to the court, with notice to the adversary, in order to have sanctions imposed for failure to make discovery. After defendant again failed to make discovery, a further application to impose sanctions upon defendant was made by plaintiff. The trial court, while finding that defendant’s conduct was not contumacious, entered an order dismissing the counterclaim and suppressing the defenses. Defendant appealed, and the Supreme Court certified the appeal on its own motion. The Supreme Court, in reversing the trial court’s order dismissing the counterclaim and suppressing the defenses, stated the necessity for providing for sanctions for failure to make discovery:

* * * Sanctions are peculiarly necessary in matters of discovery and the power to invoke them is inherent in our courts. The consequences attendant upon the failure to make discovery when ordered are provided for by Eule 8:37 and the trial court is free to apply them, subject only to the requirement that they be just and reasonable in the circumstances; see Hammond Packing Co. v. Arkansas, 212 U. S. 322, 29 S. Ct. 370, 53 L. Ed. 530 (1909) [at 338]

However, the Supreme Court further noted that

The dismissal of a parly’s cause of action, with prejudice, is drastic and is generally not to be invoked except in those cases where the order for discovery goes to the very foundation of the cause of action, Tsibikas v. Morrof, 5 N. J. Super. 306 (App. Div. 1949), or where the refusal to comply is deliberate and contumacious, Michigan Window Cleaning Co. v. Martino, 173 F. 2d 466 (C. A. 6th Gir. 1949). [at 339]

The Supreme Court stated that it did not wish to have the reversal of the judgment below to be construed as condoning defendant’s actions. The reversal of the judgment was based primarily on the fact that the trial court expressly stated that defendant’s conduct was not contumacious. Although the order suppressing the defenses was reversed, the Supreme Court stated (at 340): “Dilatory and obstructive tactics are not to be tolerated in preparation for trial any more than they would be at the trial itself.”

The Lang decision clearly set forth the policy that discovery rules must be complied with. However, the decision also clearly set the tone that drastic sanctions should rarely be imposed. Because of the necessity of making a formal motion, with notice to the adversary, and the tone set by the Lang decision, the sanction of dismissal of a claim could have been invoked by a court only in clearly extreme and contumacious circumstances.

In Tsibikas v. Morrof, 5 N. J. Super. 306 (1949), and In re Wozar’s Estate, 34 N. J. Super. 133 (1955), the Appellate Division reversed orders of dismissals which were entered for failure to make discovery. Other cases discussing sanctions for failure to make discovery are Interchemical Corp. v. Uncas Printing & Fin. Co., Inc., 39 N. J. Super. 318 (App. Div. 1956), and Douglas v. Harris, 63 N. J. Super. 313 (App. Div. 1960).

These cases follow the Lang case, supra, in both the insistence of compliance with pretrial discovery rules and the hesitancy to impose drastic sanctions.

With this background in mind the Supreme Court amended R. R. 4:23-6(e) on August 13, 1964, to be effective September 9, 1964, to read as follows:

If timely answers are not served, and no formal motion for extension under paragraph (d) has been made, the complaint, counterclaim or answer of the party failing to comply with this Rule shall be dismissed or suppressed by the court, upon the filing of an affidavit by the party entitled to answers setting forth such failure. The affidavit shall be accompanied by, and have attached to it the order of dismissal or suppression. A copy of all such orders with affidavits attached shall be served on the delinquent party within 7 days after the date thereof.

This rule has remained essentially the same and was in effect at the time plaintiffs’ action was dismissed by the court on October 18, 1967. The rule is now R. 4:23-5.

Obviously, the rule imposing sanctions for failure to answer interrogatories underwent a very significant change by the 1964 amendment. The rule is now mandatory that a complaint be dismissed upon the filing of an affidavit that answers to interrogatories have not been furnished. It is also significant that this is effectuated on an ex parte application.

The 1964 amendment also provided the procedure for the vacation of an order imposing sanctions for failure to answer interrogatories. R. R. 4:23-6(f), now R. 4:23-5(a), provided:

On formal motion the court may vacate its order dismissing a complaint, counterclaim or suppressing an answer or defense within 30 days after service of such order, provided fully responsive answers to the propounded interrogatories are presented and the delinquent party pays $50 costs to the clerk of the county of venue.

In order to understand the effect of this amendment to the rule, it is helpful to look at the committee reports which preceded the 1964 amendments.

On March 21, 1963 the New Jersey Supreme Court Committee on Pretrial Procedure reported its conclusions, cited at 86 N. J. L. J. 153, as follows:

The committee unanimously agreed that the principal problem presented under R. R. 4 :23, is the difficulty in obtaining answers to interrogatories so that discovery is completed at the time scheduled for Ihe pretrial conference.
Courts are so reluctant to enforce the unrealistic time limitations under Rule 4:23-6, for the service of answers to interrogatories and under Rule 4:28(a) for the completion of discovery that the said rules are more ofteu honored in breach than compliance. The condition has resulted in a complete breakdown in the enforcement of the time limitations provided by the rules to the extent that they have practically disappeared. The problem has caused congested motion calendars, postponed or perfunctory pretrials, and a serious delay in the final disposition of cases.
The committee believes that much of the abuse and delay that presently exist under R. R. 4:23 can be eliminated and a satisfactory solution of the problem accomplished by the adoption of realistic time limitations for the completion of discovery and for the answering of interrogatories and by uniform and strict enforcement of said requirements by the court.

In order to effectuate these ends, the committee made the folowing recommendations on April 11, 1964:

In connection with (3) (requiring interrogatories to be answered within 40 days of service) the rule amendment should require the party having the duty to answer the questions to apply formally for any necessary extension, within the 40 day period. * * * If no such application is made and timely answers are not delivered, on the filing by the party entitled to the answers of an affidavit to that effect and an appropriate order with the judge next hearing motions, the delinquent’s complaint shall be dismissed or his defense suppressed. If the statute of limitations has run on plaintiff’s canse of action, the court may grant the dismissal on condition that defendant waive the bar if judgment for costs is paid and the suit reinstated within 30 days.

Dismissal of a complaint should be without prejudice. Vacation of the dismissal or suppression of defense by the court within a reasonable time after entry of the order should be provided for in the Rule. [86 N. J. L. J. 197, at 201]

These recommendations were embodied in the tentative draft of R. R. 4:23-6, reported on November 7, 1964. 86 N. J. L. J. 625. The findings of the reports were reaffirmed by the committee on May 21, 1964:

All available information indicates that trial judges remain burdened seriously on motion days, pretrial conference days and trial days with problems arising out of use, misuse and failures connected with interrogatories. Dor this reason the mandatory penalties and the time limitations set out in R. R. 4:23-2, 4:23-6 and 4:28-8 [4:26-8] remain as originally recommended. [87 N. J. L. J. 321]

. The rule that was recommended in the above-cited reports was adopted August 13, 1964 to be effective September 9, 1964.

On May 6, 1965 the New Jersey Supreme Court Committee on Rules recommended that R. R. 4:23-6(e) be amended to make the discretionary restoration within 30 days mandatory and to make the amount of costs to be assessed discretionary instead of a mandatory $50. 88 N. J. L. J. 285. These recommendations were never adopted.

The policy set forth in R. R. 4:23-6(e) as expressed in the above cited reports is clear. In applying this policy to the facts in the instant motion, this court concludes that the application to restore this action to the active trial list must be denied.

The original order of dismissal of October 18, 1967 was without prejudice. Plaintiffs’ attorneys simply failed to comply with the rule. The explanation they offered is the following, contained in their affidavit of December 8, 1969:

2. On October 18, 1967, as a result of the failure of the plaintiff to answer interrogatories, the defendant Kragen obtained an Order Dismissing the Complaint.
3. In January 1968 the answers to interrogatories were forwarded to the defendant Kragen, hut were returned.
4. Due to inadvertence and mistake and appropriate application to restore the matter to the trial list was not made and the answers to the interrogatories were returned to the file apparently without the attention of the attorney then handling the file.

This “inadvertence and mistake” is precisely what R. R. 4:23-6 was intended to prevent. Such “inadvertence and mistake” is precisely the type of inaction which leads to the delays and calendar congestion mentioned in the committee reports.

The explanation offered for this “inadvertence and mistake” is more fully set out in the affidavits of plaintiffs’ attorneys submitted to this court on June 11, 1970. Since July of 1967 the office of plaintiffs’ attorneys has had extensive problems in obtaining office personnel and attorneys. Later, in the fall of 1967, there were internal problems in the firm which were further complicated by the senior partner’s illness in the fall of 1968. The court can sympathize with the problems set forth in the affidavits, but does not feel that those problems within the firm should operate to suspend the rules of our courts in regard to that firm.

This motion does not concern itself with the general remedy for relief from judgments provided in B. 4:50. The rule concerning interrogatories was adopted after the general rule for relief from orders or judgments had been in effect. The committee reports show that the intention behind the rule was to make the delinquent party move to vacate the order of dismissal or suppression very soon after it was entered.

This court does not mean to state that R. 4:23-5 is absolute in its statement that a motion must be made within exactly 30 days. B. 1 :l-2 concerning the construction and relaxation of the rules makes it clear that a court should act in the spirit of justice rather than adhering to a rote following of rules.

The court recognizes that it is given wide discretion in applying the rules by reason of R. 1:l-2 (formerly R. R. 1:27A). The court also agrees with the cases cited by plaintiffs’ counsel that where noncompliance with court rules is due to neglect or forgetfulness of counsel and not to any conduct of a litigant, and the other party has not been prejudiced, dismissal will not ordinarily be granted where other measures, short thereof, will suffice. Savoia v. F. W. Woolworth Co., 88 N. J. Super. 153 (App. Div. 1965); Devlin v. Surgent, 18 N. J. 148 (1955); Kazanjian v. Atlas Novelty Co., 34 N. J. Super. 362 (App. Div. 1955); Gnapinsky v. Goldyn, 23 N. J. 243 (1957), Paxton v. Misiuk, 34 N. J. 453 (1961). However, these cases generally deal with relaxation of appellate rules, and the dilatoriness of counsel in those cases was minor in relation to the case at bar.

In McLaughlin v. Bassing, 100 N. J. Super. 67 (App. Div. 1967), rev’d 51 N. J. 410 (1968), the Appellate Division reversed the trial court’s refusal to dismiss a complaint where the summons had not been issued for more than 2J^ years. The Supreme Court reversed the Appellate Division for the reasons expressed in Judge Sullivan’s dissent. Basically, this was a matter where settlement negotiations were entered into after the filing of the complaint and so plaintiffs’ counsel assumed there would be no need to prosecute the case further. McLaughlin is distinguishable from the case at bar in that in the instant case all counsel were aware that the complaint was dismissed. In McLaughlin counsel assumed the case was active.

This court must conclude that if R. 4:23-5 is to be relaxed by R. 1:1-2 in the present case, then R. 4:23-5 would be rendered meaningless. See Pagano v. Krispy Kernals, Inc., 10 N. J. Super. 588 (Law Div. 1950). As was stated in Schnitzel’, “Civil Practice and Procedure”, 5 Rutgers L. Rev. 295 (1951):

It is clear, however, that liberality in procedure has limits. The design and an essential function of rules of practice is to establish a certain order and sequence in the conduct of litigation. Flexibility, which verges upon procedural chaos, is no more desirable than the straight jacket of the common law writs. The rules will not be allowed to become booby traps; but they were written and meant to be applied.

Plaintiffs’ attorney also argues that the dismissal of the complaint operated only as to the party obtaining the order of dismissal. The language of R. 4:23-5 speaks of the dismissal of the complaint. There is no qualification which would limit the dismissal to the party seeking the order. Also, the order had to be served upon all counsel by its terms. Therefore all counsel for defendants had a right to rely on the order dismissing the complaint.

Further, once the interrogatories were served, all parties would receive a copy of the answers, which would be forwarded to them by the propounding party pursuant to R. 4:17-4(e).

For the above stated reasons, the motion to restore this action to the active trial list is denied.


author: Sugrue, J. C. C.

text:
    NATIONAL NEWARK & ESSEX BANK, A NATIONAL BANKING ASSOCIATION OF THE UNITED STATES, PLAINTIFF, v. ANTHONY GIORDANO, DEFENDANT.
    Superior Court of New Jersey Law Division
    Decided July 15, 1970.

      Mr. Samuel A. Christiano, for plaintiff.

      Mr. Monroe Jay Lustbader, for defendant (Messrs. Lustbader & Lustbader, attorneys).
   Sugrue, J. C. C.

(temporarily assigned). This case involves a suit on an installment sale and security agreement. Defendant agreed to purchase two trucks for use in his business from Joseph Fiero. To enable him to do so, plaintiff agreed to lend him $9500. Defendant signed an installment sale security agreement which recited that plaintiff would lend him $9500, which he agreed to repay in 24 equal consecutive monthly installments of $443.33, .commencing November 16, 1967. The contract is dated October 13, 1967. Defendant was to have the use and possession of the trucks in his business and plaintiff retained a security interest in the trucks and a right to retake in case of default by defendant.

On October 13, 1967 plaintiff issued its cheek by Anthony Dondona, its assistant vice-president, in the amount of 89500 payable to the order of Joseph Fiero. Defendant delivered the cheek to Fiero on October 15, 1967. On October 16, 1967, when defendant first discovered the trucks were defective, he requested plaintiff to stop payment on its chock to Fiero. The bank refused, claiming it could not stop payment on its own check. Defendant offered to post a bond to protect the bank, but this did not dissuade plaintiff from its position.

The check, in addition to Eiero’s endorsement, bears an out-of-state bank endorsement dated October 18, 1967 and subsequent endorsements.

On breach of the installment sale and security agreement the trucks were subsequently repossessed by plaintiff and sold at public auction for $1500. At the time of repossession one truck was missing its tires, wheels and brakes, and the transmission was jammed on the other. The trucks were sold for their parts value only. Plaintiff has demanded judgment for the amount due on the agreement, plus interest and costs.

The factual summary of the case is not in dispute. The primary issue raised is whether a bank may stop payment on its own check.

The question does not appear to have been decided in this State but there is a clear weight of authority in other jurisdictions which denies a bank the right to countermand tis own check. Causey v. Eiland, 175 Ark. 929, 1 S. W. 2d 1008, 56 A. L. R. 529 (Sup. Ct. 1928).; United States v. Milton, 382 F. 2d 976 (6 Cir. 1967).

A check drawn by the bank upon itself is commonly referred to as a cashier’s check. It is issued by an authorized officer of a bank, directed to another person, evidencing the fact that the payee is authorized to demand and receive from the bank, upon presentation, the amount of money represented by the check. Thus, even though the check is drawn by an authorized officer rather than the cashier, it is legally the equivalent of a cashier’s check. The check here in question is one drawn by an authorized officer and will be designated herein as a cashier’s check.

A cashier’s check is a bill of exchange drawn by the bank upon itself. 10 Am. Jur. 2d Banks, § 544, at 518. When a bank issues a cashier’s check it becomes primarily obligated to pay the amount represented upon presentation. Scharz v. Twin City State Bank, 201 Kan. 539, 441 P. 2d 897 (Sup. Ct. 1968). The transaction is not executory but rather an executed transaction of purchase and sale. It is a sale of credit by the bank to the purchaser. Kerr S. S. Co. Inc. v. Chartered Bank of India, etc., 292 N. Y. 253, 54 N. E. 2d 813, 153 A. L. R. 382 (Ct. App. 1944). The bank thus becomes a debtor and the purchaser a creditor. Schulze v. Rayunec, 350 F. 2d 666 (7 Cir. 1965), cert. den. Boughner v. Schulze, 382 U. S. 919, 86 S. Ct. 293, 15 L. Ed. 2d 234. The purchaser’s obligation on the check becomes secondary and the bank is both the drawer and drawee. It undertakes to draw the amount represented from its own resources. It must theerfore of necessity be said that issuance of the cashier’s check constitutes an acceptance of it by the issuing bank. In drawing the instrument the bank represents that as drawee it will honor the draft when presented. The requirements for an acceptance as set forth in N. J. S. A. 12A:3-410(1) are fulfilled by the affixing of the signature of the agent of the issuing bank. The rule may thus be stated that a cashier’s check is accepted for payment when issued. See Mellon National Bank v. Citizens Bank & Trust Co., 88 F. 2d 128 (8 Cir. 1937), cert. den. 302 U. S. 702, 58 S. Ct. 21, 82 L. Ed. 542.

Under the provisions of N. J. S. A. 12A:4-303 a stop-order, whether or not effective under other rules of law to terminate or suspend the bank’s right or duty to pay an item, comes too late to terminate or suspend such right or duty if it is received after the bank has accepted or certified the item. Since a cashier’s check is accepted when issued, N. J. S. A. 12A:4-303 in effect makes it impossible to stop payment on a cashier’s check once it has been issued.

In addition to the statutory prohibition against stopping payment on a cashier’s check, the nature and usage of these checks require such a rule. A cashier’s check circulates in the commercial world as the equivalent of cash. Scharz, supra. People accept a cashier’s check as a substitute for cash because the bank stands behind it, rather than an individual. In effect, the bank becomes a guarantor of the value of the cheek and pledges its resources to the payment of the amount represented upon presentation. To allow the bank to stop payment on such an instrument would be inconsistent with the representation it makes in issuing the check. Such a rule would undermine the public confidence in the bank and its checks and thereby deprive the cashier’s check of the essential incident which makes it useful. People would no longer be willing to accept it as a substitute for cash if they could not be sure that there would be no difficulty in converting it into cash.

In support of his position defendant relies on N. J. S. A. 12A:4-403, which is entitled “Customers Right to Stop Payment.”. The section authorizes a customer to order the bank to stop, payment of any item payable for his account. A cashier’s check is not one payable for the customer’s account but rather for the bank’s account. As stated above, it is the bank which is primarily obligated on the cheek, not the customer. Scharz, supra.

Defendant further relies on Citizens Nat'l Bank of Englewood v. Ft. Lee S. & L. Ass’n, 89 N. J. Super. 43, 213 A. 2d 315 (Law Div. 1965). That case, however, involved a “bank check” drawn by one bank on its account in another bank, rather than a cashier’s check as in the case at bar. The distinction between these was pointed out in Causey v. Eiland, supra. The principal difference insofar as the present case is concerned is that a “bank check” is, in effect, an ordinary check since it is not accepted when issued and may be dishonored by the bank upon which it is drawn when it is presented for payment. This difference undermines the basic defense offered by defendant at trial. Defendant’s offer to post a bond to insure plaintiff that it would not be damaged by stopping payment on the check is no defense to plaintiff’s action. The bank could not stop payment on its cashier’s check as a matter of law. The proofs showing that the bank received notice prior to the cashing of the check are likewise of no avail to defendant. Regardless of the length of time available to the bank, it still was without authority to stop payment.

Defendant’s answer urges failure of consideration and fraudulent misrepresentation by the seller of the trucks as additional defenses. Assuming both to bo true, neither is a good defense to the present action. This action is a suit on an installment sale and security agreement executed by defendant. It is not contested here that he received the cashier’s check and delivered it to the payee, nor is it asserted that fraud was practiced by plaintiff in this transaction. Any alleged fraud of which defendant was a victim was practiced by the seller of the trucks in inducing defendant to purchase them. Plaintiff is not chargeable with this fraud. Any remedy defendant may have, based on lack of consideration or fraud, must be sought from the seller of the trucks, who is not a party to this suit.

Judgment will be entered in favor of plaintiff and against defendant in the amount of $10,841.60.


author: Meanor, J. C. C.

text:
    ASSOCIATES DISCOUNT CORPORATION, PLAINTIFF, v. FIDELITY UNION TRUST COMPANY, DEFENDANT.
    Superior Court of New Jersey Law Division
    Decided July 23, 1970.

      Mr. Milton S. Kramer for plaintiff (Messrs. Kramer & Kramer, attorneys).

      Mr. William I. Riker for defendant (Messrs. Riker, Danzig, Scherer & Brown, attorneys).
   Meanor, J. C. C.

(temporarily assigned). On February 7, 1963 a financing statement between Mort Maltz, Inc., a truck dealer, as debtor, and plaintiff, Associates Discount Corporation, as secured partjr, was filed with the Secretary of State. N. J. S. A. 12A:9-302. This statement covered new and used motor vehicles and all proceeds thereof. A continuation of this statement was filed August 16, 1967. N. J. S. A. 12A:9-403.

From May 8 to December 23, 1968 plaintiff advanced a total of $60,300 to Mort Maltz, Inc. receiving in return promissory notes and security agreements with respect to nine trucks. No amount of this sum has been paid.

During December 1968 and January 1969 Mort Maltz, Inc. sold nine trucks, the subject of plaintiff’s liens, and in January, 1969 deposited the proceeds thereof in an account maintained with defendant Fidelity Union Trust Company. Mort Maltz, Inc. had the right under its agreements with plaintiff to sell the trucks free from any security interest. The total cash proceeds derived from the nine sales were $37,750. Although not brought out, the difference between this amount and the total of plaintiff’s advances may be explained by trade-in allowances or, perhaps, the selling of the trucks on a time-payment basis. The affidavit submitted by plaintiff and the exhibits annexed thereto clearly trace the proceeds of these nine sales to the Mort Maltz, Inc. account with defendant.

On May 3, 1963 defendant Eiledity Union Trust Company filed with the Secretary of State a financing agreement between it as secured party and Mort Maltz, Inc. as debtor. This agreement covered the debtor’s inventory of new and used trucks, truck-tractors and trailers and all proceeds thereof, and was continued by a filing on April 1, 1968. Pursuant to this agreement defendant advanced to Mort Maltz, Inc. 50% of its cost of certain used trucks, none of which were the subject of plaintiff’s financing agreement.

Eor each truck financed by defendant, the debtor executed a demand note and chattel mortgage. Defendant checked the debtor’s inventory monthly, and on December 31, 1968 found that two items covered by its financing agreement had been sold for a total of $7,500. Defendant demanded payment but a Mr. Maltz, apparently the controlling officer of the debtor corporation, was hospitalized and no one else had authority to sign checks. Mr. Maltz died January 30, 1969 and on January 31, 1969 defendant learned that an additional three vehicles covered by its agreement had been sold and another vehicle had been stolen. Defendant then ordered the account maintained by the debtor with it be charged with the debt of $36,500 that had been incurred with respect to these six items, plus $541.59 interest or a total of $37,041.59. The instruments of security applicable to these six items (except, of course, for the statements filed with the Secretary of State) were returned to the debtor or destroyed at the time the debtor’s account was charged. .

Plaintiff brings this suit to recover the $37,041.59 charged by defendant against the Mort Maltz, Inc. account on the theory that its lien had priority to the bank’s right to set-off, since the funds against which the bank setoff were clearly the proceeds of sales of vehicles covered by its security agreement. Defendant bank, while it does not acquiesce in plaintiff’s tracing of these funds, does not offer any contrary proof and does not contend that it setoff against funds which were the proceeds of sales of items upon which it held a security interest. Both parties have moved for summary judgment.

The filed financing statement of plaintiff covered proceeds. N. J. S. A. 12A:9-306(3) (a). Under N. J. S. A. 12A:9-306(2) plaintiff’s security interest continued in any identifiable proceeds of the collateral, “including collections received by the debtor,” and therefore continued in the identifiable proceeds of sales that were deposited in defendant bank. Any withdrawals by the debtor from this account will be presumed to be of its general funds, leaving intact, so far as possible, the funds received from sales of collateral covered by plaintiff’s security agreement. Smith v. Combs, 49 N. J. Eq. 420 (Ch. 1892); General Motors Acceptance Corp. v. Larson, 110 N. J. Eq. 305 (Ch. 1932).

Defendant relies on N. J. S. A. 12A:9-104(i), which provides that

[T]his Chapter does not apply * * *
********
(i) to any right of set-off * * *

This section, however, cannot mean that a general creditor, as the bank is here with respect to the funds in question, may abrogate a perfected security interest simply by having a right to and opportunity for a set-off. All this section means is that a right of set-off may exist in a creditor who does not have a security interest. See Gilmore, Security Interests in Personal Property (1965), at 315-316, in which it is said concerning the “set-off exclusion” of N. J. S. A. 12A:9-104(i):

This exclusion is an apt example of the absurdities which result when draftsmen attempt to appease critics by putting into a statute something that is not in any sense wicked but is hopelessly irrelevant. Of course a right of set-off is not a security interest and has never been confused with one. The statute might as appropriately exclude fan dancing. A bank’s right of set-off against a depositor’s account is often loosely referred to as a “banker’s lien,” but the “lien” usage has never led anyone to think that the bank held a security interest in the bank account.

Defendant also cites Briscoe Co., Inc. v. Suburban Trust Co., 100 N. J. Super. 431 (App. Div. 1968), and American Lumbermen’s, etc., Co. v. Bradley Const. Co., 127 N. J. Eq. 500 (Ch. 1940), affirmed 129 N. J. Eq. 278 (E. & A. 1941), for the proposition that it may setoff against funds in the general account of a depositor in the absence of actual knowledge on its part that the funds in the account were subject to a security interest. However, these cases, if applicable, are subject to the superior authority of the Legislature which, by enacting the Uniform Commercial Code, continued a plaintiff’s security interest in the identifiable proceeds of sales of the collateral. N. J. S. A. 12A:9-306(2) See Annotation, “Bank’s right to apply third person’s funds, deposited in debtor’s name, on debtor’s obligation,” 8 A. L. R. 3d 235, 242 (1966).

Since there is no “genuine issue as to any material fact,” R. 4:46-2, this matter appropriately may be resolved on the present cross-motions for summary judgment. Judson v. Peoples Bank & Trust Co. of Westfield, 17 N. J. 67 (1954). Defendant’s motion for summary judgment is denied. Plaintiff’s motion for summary judgment is granted and judgment may be entered in favor of plaintiff in the amount of $37,041.59.