Which text editors (free or commercial) handle character encoding and Windows/Unix line breaks properly?
I can't think of any that does not. I do not count notepad.exe.
textpad does a good job. i like version 4.7 it is much nicer than 5.*
jEdit does it.
I should think the vast majority do. Certainly Vim and Emacs will.
Here's a list of Text editors and their newline support.
Also see this list and look at the Newline conversion field
Eclipse also does a great job between reformatting between windows and Unix. Additionally as mentioned before, Emacs is great too.