## Facts

- In December 1984, Elizabeth Maxwell and her then-husband purchased a home solar water-heating system sold door-to-door for $6,512, including installation.
- The system was never properly installed, did not work, and was later declared hazardous and ordered disconnected by the City of Phoenix.
- Fidelity Financial Services financed the purchase on a 10-year loan at 19.5% interest, resulting in nearly $15,000 in total payments.
- Fidelity took security interests in the heater and a deed of trust on the Maxwells’ home, valued at about $40,000 and in need of repairs.
- Maxwell had low income (about $400 per month), while her husband earned about $1,800 per month.
- After paying for more than three years, Maxwell sought an additional $800 loan in 1988; Fidelity rolled the remaining 1984 balance (about $5,733) and the $800 into a new contract at the same interest rate, again secured by the home.
- The refinancing increased the total amount to be paid to approximately $17,000 for the nonfunctioning heater plus the $800 cash.
- In 1990, Maxwell stopped paying and sued for a declaration that the 1984 contract was unconscionable and unenforceable.

## Issues

1. Whether a refinancing agreement treated as a novation can bar a borrower’s claim that the original contract was unconscionable and unenforceable.
2. Whether unconscionability under Arizona law and UCC § 2-302 may be established by substantive unconscionability alone, including gross price-cost disparity and oppressive security terms.
3. Whether the trial court may grant summary judgment without an evidentiary inquiry into the commercial setting, purpose, and effect relevant to unconscionability.

## Decision

- The Arizona Supreme Court vacated the court of appeals’ decision, reversed summary judgment for Fidelity, and remanded.
- The court held the trial court erred by accepting novation as a complete bar without first determining whether the 1984 agreement was unconscionable.
- The court held substantive unconscionability alone can support nonenforcement, particularly where there is gross price-cost disparity or oppressive remedial limitations.
- The court directed that unconscionability, though a question of law, required factual development through an evidentiary inquiry into the transaction’s commercial setting, purpose, and effect.

## Legal Principles

- Unconscionability under UCC § 2-302 (as enacted in Arizona) is a question of law for the court, but the court must permit development of relevant facts about the commercial setting, purpose, and effect of the challenged terms.
- Procedural unconscionability (bargaining unfairness) and substantive unconscionability (oppressive terms) are analytically distinct; a plaintiff need not prove both in every case.
- Substantive unconscionability alone may justify refusal to enforce a contract, especially where price is grossly excessive in relation to value or terms are unduly harsh and one-sided.
- A novation requires a valid existing obligation; if the original contract is unenforceable due to unconscionability, a later refinancing premised on that obligation cannot insulate the original transaction from challenge.
- Summary judgment is improper when the record raises a materially disputed or undeveloped factual basis necessary for the court’s legal determination of unconscionability.

## Conclusion

The Arizona Supreme Court held that a refinancing characterized as a novation cannot preclude scrutiny of whether the original consumer-finance contract was unconscionable, and it clarified that extreme substantive unfairness may alone warrant nonenforcement; the case was remanded for an evidentiary inquiry and a judicial determination of unconscionability.


Maxwell v. Fidelity Fin. Servs., Inc., 184 Ariz. 82, 907 P.2d 51 (Ariz. 1995)