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Ocean County National Bank v. Palmer

Decided: February 28, 1983.

OCEAN COUNTY NATIONAL BANK, PLAINTIFF-APPELLANT,
v.
CHARLES PALMER, GUY H. HESS AND MARY C. HESS, HIS WIFE, AND FIRST COMMERCIAL CORPORATION, DEFENDANTS-RESPONDENTS



On appeal from Superior Court, Law Division, Ocean County.

Botter, Polow and Brody. The opinion of the court was delivered by Botter, P.J.A.D.

Botter

This appeal concerns the priority of liens on a boat which was sold twice by the same merchant to two different purchasers and was pledged as collateral for two loans without the first lien having been satisfied and discharged. The trial judge gave priority to the lien held by First Commercial Corporation (First Commercial) which had financed the second sale. Based upon our interpretation of the pertinent provisions of Title 12A, N.J.S.A. 12A:9-306(2) and N.J.S.A. 12A:9-307(1), we are compelled to reverse, giving priority to the first secured creditor, notwithstanding the hardship to the innocent purchasers in the second sale.

On October 30, 1978 respondent Charles Palmer (Palmer) purchased a 22-foot Penn Yan boat from Normandy Beach Marina (Normandy Beach) for $13,400. Palmer made a down-payment of $1,900 and financed the balance with Normandy Beach, which took a security interest in the boat. Normandy Beach then assigned all of its rights to the Ocean County National Bank (Ocean County Bank), which timely filed a UCC financing statement with the Monmouth County Clerk's Office and the Secretary of State. The financing statement listed Ocean County Bank as the secured party and was signed by Palmer as the debtor. See N.J.S.A. 12A:9-105(1)(m); N.J.S.A. 12A:9-402(1).

Sometime thereafter, Palmer returned the boat to Normandy Beach with the understanding that it would be sold on his behalf

and the Ocean County Bank lien satisfied. On April 30, 1979 respondents Guy and Mary Hess (Hess) purchased the boat from Normandy Beach, apparently out of inventory, for $11,500. Hess made a $4,500 downpayment and financed the balance with Normandy Beach, which took a security interest in the boat. The retail installment contract named Normandy Beach as the seller. Normandy Beach thereafter assigned its rights to First Commercial.*fn1

Normandy Beach did not satisfy Palmer's debt to Ocean County Bank and did not obtain a discharge of that bank's lien. When Palmer later discovered that the boat had been sold, he stopped making payments on his loan. Ocean County Bank declared the loan in default and, after locating the boat at the Hess home, repossessed it on May 2, 1980. Following a textbook scenario, Normandy Beach filed for bankruptcy.

Ocean County Bank brought this action to determine the priority of the two outstanding liens. Each of the parties also sought damages and various other remedies. The trial judge fixed the order of priorities in a partial summary judgment, subordinating Ocean County Bank's lien to that of First Commercial. Because some damage claims were not addressed, no final judgment was entered as to all parties. We have determined, however, that the interlocutory nature of this appeal ought not preclude disposition of the merits of the controversy. Therefore, we now grant leave to appeal nunc pro tunc on our own motion. See Butler v. Bonner & Barnewall, Inc., 56 N.J. 567, 573, n. 2, n. 3 (1970).

The problem here is that neither Hess nor First Commercial knew that the boat bought by Hess was owned by Palmer. They had no reason to search for a financing statement signed by Palmer as debtor and had no notice that the boat being sold

by Normandy Beach was encumbered by a lien previously created by Palmer.*fn2 Thus, all parties agree that Mr. and Mrs. Hess were buyers in the ordinary course of business, having purchased the boat in good faith and without knowledge of Ocean County Bank's security interest. See N.J.S.A. 12A:1-201(9).

Nevertheless, the general rule governing the sale of encumbered collateral is found in N.J.S.A. ...


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