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Creeping Consumerism and Class Actions; Exculpatory Contracts

Dispatches from the Trenches

New York Career Guidance Serv. v. Wells Fargo Fin. Lease, 2005 WL 1252315)(N.J. Super. Ct. Law Div., May 2, 2005)

This is a scary case in many respects. It involves a lease by a New York not-for-profit corporation (Lessee) of computer equipment for its office. The lease was assigned by the Vendor-Lessor to Wells Fargo.

One provision of the lease stated, "[i]f any payment is not made when due, you agree to pay a late charge at the rate of ten percent (10%) of such late payment or up to $50.00, at lessor’s discretion." The monthly payments under the particular lease in question were only $53.64, but when Lessee was late on several payments Wells Fargo, seeking to maximize profit, charged Lessee a $50 late fee on each late payment. Lessee stopped making payments and commenced an action under the New Jersey Consumer Fraud Act (NJCFA), which makes it unlawful to use "any unconscionable commercial practice, deception, fraud, false pretense, false promise, [or] misrepresentation … in connection with the sale or advertisement of any merchandise..." Lessee also sought class action certification.

One of the most conceptually disturbing aspects of the court’s decision that should trouble lessors and funders is that the court doesn’t discuss anywhere in the case why a consumer protection act should apply to a commercial transaction. This sort of "creeping consumerism" can also be seen in other cases, too, where New Jersey courts have applied consumer protection laws in some business transactions as well, depending on the facts of the case and such factors as the sophistication and the bargaining power of the purchaser. For more, see Bradstreet Personnel Group, Inc. v. Wells Fargo Financial Leasing, Inc., No. BER-L-3212-03, 2005 WL 1252333 (N.J. Super. Ct. Law Div., May 2, 2005).

A less disturbing, but still noteworthy, aspect of the case was that the court rebuffed Wells Fargo’s argument that it was not liable since assignment language in the lease stated that the Lessee would "not assert against the [Assignee of this Lease] any claims, defenses or set-off that you may have against the supplier." The court held that Lessee’s claims were made against Wells Fargo for Wells Fargo’s decision to charge the $50 late fee, not for the supplying company’s activities, and as such Wells Fargo was not immune to the action. Although there is a reasonable basis for the court’s decision on this issue, funders are never happy to see courts so easily push aside language of this sort in the assignment provisions of a lease.

Wells Fargo also received bad news on the "meat" of the case. Although Wells Fargo prevailed on one argument, it lost on the other. On the positive side, the court noted that the test for a deception violation of the NJCFA is whether the defendant’s conduct has the capacity to mislead the average consumer. The court held that Wells Fargo’s conduct did not have the capacity to mislead the average consumer as the contract terms were explicit and clear, and as such, summary judgment for Wells Fargo was granted on these counts.

However, on the negative side, the court noted that test for the conscionability of late fees under the NJCFA is whether the late fee provision is reasonable under the totality of the circumstances. Even though Lessee introduced zero evidence that the late fees were unreasonable, the court stated that "the math does not lie: the equivalent interest rate of a $50 late fee on a $53.64 installment is greater than 90% [and that] is enough to survive summary judgment by strongly suggesting that the presumption of reasonable is likely to be overcome at trial."

To make matters worse, the court certified a class (although a more limited one) for a class action lawsuit against Wells Fargo for this practice.

Bradstreet Personnel Group, Inc. v. Wells Fargo Fin. Leasing, 2005 WL 1252333) (N.J. Super. Ct. Law Div., May 2, 2005)

Various lessees brought a class action lawsuit against Wells Fargo, as assignee under equipment leases originated by Greentree Financial Corporation. The assigned leases contained a clause which required the lessee to provide not less than 90 and not more than 150 days prior written notice of its intention to purchase or return the equipment. If the lessee failed to do so, the leases automatically renewed. According to the lessees, the equipment lease was deceptive on when notice to lessor would qualify as timely and the lease was therefore unconscionable under the NJCFA. The lessees also alleged several other similar causes of actions such as the breach of the implied covenant of good faith and fair dealing and unjust enrichment. Wells Fargo moved for summary judgment.

Wells Fargo eventually prevailed on summary judgment since the court found that it would be unreasonable to conclude that Wells Fargo had engaged in any conduct that had the capacity to mislead. The court was particularly persuaded by the fact that the lessees neither read their respective leases nor asked questions of the lessor as the leases requested they do if something was unclear. As such, the court rendered summary judgment in favor of lessor and dismissed lessees' claims in concluding that lessor did not violate the NJCFA, breach the lease, breach the implied covenant of good faith and fair dealing, or profit from an unjust enrichment from the automatic renewal of the equipment leases.

Despite the fact that Wells Fargo eventually succeeded with respect to this particular claim, much of the holding is very disturbing. First, the court went into a lengthily analysis of the NJCFA and concluded that the term "consumer" could include c commercial lessees stating:

"While the term 'consumer' has historically connoted an individual purchaser, the NJCFA provides generous protection to defrauded consumers and has been interpreted to afford protection to corporate and commercial entities that purchase goods and services for use in business operations [since b]usiness entities, like individual consumers, cover a wide range. Some are poor, some wealthy; some are naïve, some sophisticated; some are required to submit, some are able to dominate."

In addition, the court rebuffed Wells Fargo's argument that it was not liable since assignment language in the lease stated that the Lessee would "not assert against the [Assignee of this Lease] any claims, defenses or set-off that you may have against the supplier." The court held that Lessee’s claims were made against Wells Fargo for Wells Fargo's "actions, conduct, and its interpretation of the Lease Agreement."

Jordan v. Diamond Equip. & Supp. Co., 2005 WL 984513 (Ark., Apr. 28, 2005)

Lessee leased a Bobcat loader from Lessor in order to further his landscaping business. Among the provisions included in the lease by the Lessor was an exculpatory clause attempting to relieve Lessor from "injuries or damages sustained in the use of these items whether the damages are due to neglect, mechanical failure, or any other cause whatsoever, regardless of who happens to be operating the equipment." Lessee subsequently severely injured himself while using the leased equipment and brought a negligence action against Lessor in an Arkansas court. The trial court granted summary judgment in favor of Lessor. Lessee appealed.

On appeal, the Court evaluated whether the exculpatory clause should be void for public policy reasons by examining the clause under a "total transaction" test and the three-factor Finagin test. (See Finagin v.Arkansas Dev. Fin. Auth., 355 Ark.440, 139 S.W.3d 797 (2003)).  The total transaction test looks to the circumstances surrounding the execution of the document, including factors such as, but not limited to, the previous execution of similar documents, whether a party was forced to sign, and whether the parties had equal bargaining power. The three-factor Finagin test proposes that an exculpatory clause may be enforceable if: (1) the party agreeing to the exculpatory clause knows of the potential liability is released; (2) the party agreeing to the exculpatory clause benefits from the activity which may lead to the potential liability that is released; and (3) the contract that contains the exculpatory clause is fairly entered into.

The Court concluded that the exculpatory clause passed the total transaction test as Lessee was not forced to sign the contract, but sought out Lessor to engage in the transaction. The Court also concluded that the exculpatory clause passed the Finagin test. The Court found, in satisfaction of the first Finagin factor, that the Lessee knew of the potential liability that was released by initialing statements that he had received safety training and had read the damage waiver. The Court found, in satisfaction of the second Finagin factor, that Lessee benefited from the lease of the bobcat loader as it assisted him in his occupation. Finally, in satisfaction of the third Finagin factor, the Court found that since there was no evidence of fraud, undue influence, lack of capacity, mutual mistake, or inequitable conduct sufficient to void the contract, that the contract was fairly entered into, and as such, the exculpatory clause was enforceable and was not against public policy.

The Court also held the exculpatory clause was not void for lack of mutuality of obligation as the clause was part of the valid lease agreement and the exculpatory clause was not excluded from the contract because it lacked conspicuity as Lessee initialed the provision. Moreover, the Court held the exculpatory provision was not so vague that it did not expressly describe the liability to be avoided as the lease provided that the Lessor was released from liability from any injuries due to "neglect, mechanical failure, or any cause whatsoever." Finally, the Court held the exculpatory clause was not unconscionable as there was no gross inequality of bargaining power and the Lessee was aware of the exculpatory clause when he entered into the agreements.

Article appeared in the February,  2006 issue of the Monitor.
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