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Sea Harvest Inc. v. Rig & Crane Equipment Corp.

Decided: August 6, 1981.


Haines, J.s.c.


This is an action brought by Sea Harvest, Inc., the purchaser of a hydraulic crane, against Rig & Crane Equipment Corp., which sold the crane to plaintiff, and Allis Chalmers Credit Corp., a creditor of Rig & Crane claiming a perfected security interest in the crane. Plaintiff seeks a permanent injunction against repossession of the crane by Allis Chalmers and a declaratory judgment confirming plaintiff's title to the crane and damages. Rig & Crane has not defended the action.

The parties have submitted the matter for determination on the record. The undisputed facts are as follows. Plaintiff needed a hydraulic crane for its fishery operations; it arranged to lease one, under a verbal agreement, from defendant Rig & Crane Equipment Corp. on August 11, 1976. The crane was then at Rig & Crane's place of business in Pennsylvania and was delivered to Sea Harvest, in New Jersey, on August 12, 1976. On September 12, 1977 plaintiff obtained a written lease (reflecting a commencement date of "8-12-76") and an option to purchase the crane for $19,950, against which price all rental payments were to be credited. On March 6, 1978 plaintiff exercised the option in accordance with its terms.

On October 11, 1976 defendant Allis Chalmers loaned $39,000 to Rig & Crane, securing the loan with a security agreement covering the crane then leased to Sea Harvest and later the subject of its option. The security agreement contained no provision for the sale of the equipment. Financing statements referring to the agreement were filed by Allis Chalmers in Pennsylvania on October 11, 1976 and on November 3, 1977; an additional statement was filed in New Jersey on December 5, 1977. Rig & Crane failed to repay its loan; on April 10, 1978 Allis Chalmers advised Sea Harvest that it intended to repossess the crane. This suit was then commenced.

Plaintiff's claim to title rests upon N.J.S.A. 12A:9-307(1), which provides:

A buyer in ordinary course of business (sub-section (9) of 12A:1-201) other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.

Plaintiff maintains that it is a buyer in the ordinary course, without knowledge of the existence of the security interest, and it thus entitled to take free of any claim of Allis Chalmers. Cunningham v. Camelot Motors, Inc. , 138 N.J. Super. 489, 493 (Ch.Div. 1975). A "buyer in the ordinary course" is defined in subsection (9) of N.J.S.A. 12A:1-201 as

Allis Chalmers claims that Rig & Crane was in the business of leasing cranes and similar equipment and was not "in the business of selling goods of that kind". The requirement is crucial. The First Nat'l Bank of Bay Shore v. Stamper , 93 N.J. Super. 150 (Law Div. 1966), considered the position of the purchaser of an automobile which was subject to a conditional sales contract. The seller was not an automobile dealer. The court said (at 159): "Clearly, defendant was not a buyer in the ordinary course when he purchased the Thunderbird from Stamper, because it was not bought in the ordinary course from a person in the business of selling goods of that kind."

It is clear that one who leases is not a seller of goods under the statute. While New Jersey courts have not passed on the question, other authorities are convincing. In Hempstead Bank v. Andy's Car Rental System, Inc. , 35 App.Div. 2d 35, 40, 312 N.Y.S. 2d 317, 321 (App.Div. 1970), the court held that a purchaser of a car from a rental company was not a buyer in the ordinary course of business. White & Summers, Uniform Commercial Code (1972), at 941, commented on the decision:

The case seems a reasonable interpretation of ยง 9-307(1). One who buys from a seller whose principal business is renting or using goods should be on notice that he may be subject to a security interest and that the secured creditor will not necessarily contemplate that buyers take free. We suspect that as an empirical fact such buyers are more likely to check the filings and that it is a reasonable allocation of risks between the innocent secured creditor and the innocent purchaser to allow the secured creditor to win such cases.

Other cases supporting this interpretation are O'Neill v. Barnett Bank of Jacksonville , 360 So. 2d 150 (Fla.D.Ct.App. 1978), and McKenzie v. Oliver , 571 S.W. 2d 102 (Ky.App. 1978). In O'Neill the court held (360 So. 2d at 152) that a sale incidental to the principal business of the seller did not make the seller a person who was in the business of selling goods and therefore the purchaser was not a buyer in the ordinary course. McKenzie involved facts similar to those in question here and held that a leasing company which sells used ...

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