The opinion of the court was delivered by: ACKERMAN
This diversity case involves a dispute over 62,443 tons of sand. The plaintiff, Martin Marietta Corporation, purchased about 136,657 tons of sand during the last three months of 1973 from Hollander Sand Associates, ("Hollander")
taking delivery on 59,189 tons and stockpiling the rest at Hollander's facilities in Woodmansie, New Jersey.
The stockpiled sand, as inventory of Hollander, was subject to a security interest held by the defendant New Jersey National Bank ("Bank"). Throughout the fall of 1974, Hollander had trouble meeting its loan payments to the Bank and finally defaulted. On December 7, 1974, the Bank took over the sand plant and authorized its agent to sell the sand located there. The plaintiff, claiming that the Bank sold its sand, brought suit for conversion.
The Third Circuit reversed on both grounds. It held that the sand had been identified to the contract between Martin Marietta and Hollander, although the record was unclear as to when exactly this identification occurred. Martin Marietta Corp. v. N.J. National Bank, 612 F.2d 745, 751 (3d Cir. 1979). Thus, Martin Marietta was entitled to assert a claim against the Bank, a third party, even though the sand had been left in the possession of the seller, Hollander.
Under N.J.S.A. 12A:9-307, a "buyer in the ordinary course of business" takes free of a perfected security interest created by his seller even if the buyer knows of the security interest. "Buyer in the ordinary course of business" is defined in N.J.S.A. 12A:1-201(9) as:
.... a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker.
The Third Circuit considered two elements, "good faith" and "buying in the ordinary course," to be critical in determining whether Martin Marietta satisfied this definition. Adopting a subjective standard, the court stated that in this case, the question of good faith turned upon whether the plaintiff knew that the sale of sand was not in the ordinary course. Martin Marietta, supra at 753. But this question, in turn, depends on whether in fact the sale was not in the ordinary course. The court, however, declined to establish a test for determining "buying in the ordinary course." Stating that the article on bulk transfers, N.J.S.A. 12A:6-101 et seq. provided a possible framework for analysis of this question, the Third Circuit remanded the case for consideration on that theory and any other theory that may be applicable. Martin Marietta, supra at 754. The parties have agreed to a trial on the record as established. This opinion constitutes my findings of fact and conclusions of law on remand.
For the reasons which I will explain in greater detail herein, I have concluded that the transaction between Martin Marietta and Hollander did not constitute a bulk transfer because it was in the ordinary course of business of Hollander. Martin Marietta's rights in the sand, therefore, take precedence over New Jersey National Bank's security interest. Additionally, I have considered the Bank's newly raised defenses under N.J.S.A. 12A:2-402(2) (fraudulent retention) and N.J.S.A. 12A:2-712 (cover) because the Third Circuit's directions on remand invited consideration of other applicable theories for resolution of the dispute. However, in my judgment the facts do not support the defenses raised and the defendant Bank is liable to Martin Marietta for conversion of the sand.
A bulk transfer is defined in N.J.S.A. 12A:6-102(1) as:
... any transfer in bulk and not in the ordinary course of the transferor's business of a major part of the materials, supplies, merchandise or other inventory of an enterprise subject to this Article.
In assessing whether the transaction between Martin Marietta and Hollander meets the definition of a bulk transfer, I must first determine what the ordinary course of business was for Hollander. This inquiry is hampered by the fact that Hollander began production in June 1973, only a few months prior to the transaction in question. There is thus no established pattern of business behavior with which to compare the Martin Marietta purchase. It is appropriate, therefore, to consider the projected course of business based on production capacity.
The facts reveal that the sand plant was situated on 1,500 acres with a potential yield of 50 million tons of natural sand. The plant had the capacity to process approximately 500 tons of finished natural sand an hour and, at peak production, to process about 190,000 tons of sand per month. The sand could be shipped out by railroad in either 3,500 ton lots or 7,000 ton lots. In the second month of production the plant produced 100,000 tons of sand and loaded 320 railroad cars of 771/2 ton capacity. It is clear from this recitation that Hollander intended a business of large quantity sand sales for commercial and construction use.
In this business context, the size of the sale to Martin Marietta could not be described in the terms often applied to bulk transfers, namely as a "rare, irregular event, occurring but few times in the life of a merchant." Sternberg v. Rubenstein, 305 N.Y. 235, 112 N.E.2d 210 (1953). Clearly, Martin Marietta's purpose in contracting to buy 50,000 tons of sand per month for three months to keep Hollander afloat pending a decision whether to acquire the plant was rare. Buyers interested in purchasing the whole business do not appear every day. But Martin Marietta's method of "testing the waters" was to make ordinary purchases. Thus while the underlying purpose was unusual, the sale of the sand itself was not. Indeed, Martin Marietta's very purpose makes the sale a far cry ...