Martin Marietta Corp. v. New Jersey Nat. Bank

• Decision Date: 28 December 1979
• Docket Number: No. 79-1447,79-1447
• Citation: 612 F.2d 745,27 UCC Rep. 1153
• Parties: 27 UCC Rep.Serv. 1153 MARTIN MARIETTA CORPORATION, a Corporation of the State of Maryland, Appellant, v. NEW JERSEY NATIONAL BANK, a National Banking Association, Defendant and Plaintiff on Counterclaim, v. TAMBURELLI PROPERTIES, INC., Additional Defendant on Counterclaim.
• Court: U.S. Court of Appeals — Third Circuit

Page 745

612 F.2d 745

27 UCC Rep.Serv. 1153

MARTIN MARIETTA CORPORATION, a Corporation of the State of

Maryland, Appellant, v. NEW JERSEY NATIONAL BANK, a National Banking Association, Defendant and Plaintiff on Counterclaim, v. TAMBURELLI PROPERTIES, INC., Additional Defendant on Counterclaim.

No. 79-1447.

United States Court of Appeals, Third Circuit.

Argued Nov. 13, 1979.

Decided Dec. 28, 1979.

Jerome J. Graham, Jr., Laurence Reich, William A. Carpenter, Jr., Carpenter, Bennett & Morrissey, Newark, N.J., for appellant.

Richard N. Shaine, Stark & Stark, Lewis J. Pepperman, Trenton, N.J., for appellee.

Before SEITZ, Chief Judge, ALDISERT, Circuit Judge, and HUYETT, District Judge. ^*

OPINION OF THE COURT

SEITZ, Chief Judge.

This is a diversity case involving New Jersey law in which the plaintiff, Martin Marietta Corp., appeals from a final judgment for the defendant, New Jersey National Bank. After trial without a jury, the district court held that the defendant's security interest in certain sand held as inventory takes precedence over the rights of the plaintiff because the plaintiff does not qualify as a buyer in ordinary course under the Uniform Commercial Code (UCC). ¹

I. Factual Background

Hollander Sand Associates (Hollander) ² is involved in the excavation and sale of sand for commercial and construction use. In the fall of 1972 and the spring of 1973, Hollander obtained a series of loans from the defendant. In the spring, the defendant and Hollander executed a security agreement and financing statement, and the defendant made the filings required by the UCC to perfect its security interest.

Both the security agreement and the financing statement provide in relevant part that collateral for the loan shall be:

All of Debtor's . . . inventory . . . and any and all sand . . . now or hereafter located and extracted (at Hollander's New Jersey plant) . . . and any and all other assets of whatsoever kind, nature and description of Debtor, whether now existing or hereafter acquired, including by way of example, but not by way of limitation, any and all additions, accessions, replacements and substitutions to or for the same, together with the proceeds and products thereof.

In addition, item 7 on the financing statement was checked to indicate that the proceeds from sales of the collateral would be covered by the security agreement.

Part of the plaintiff's operations include production of road construction materials. Prior to the events involved here, it did not have its own source of natural sand for concrete. In the late summer of 1973, facing cash flow problems, Hollander contacted the plaintiff and several other firms with respect to a possible acquisition of Hollander by one of the firms. In August of 1973, the plaintiff's representatives began meeting with Hollander to discuss the purchase.

On August 22, 1973, John P. Frawley, part of the managerial staff in the plaintiff's acquisition department, wrote to his superior:

As an alternative to a quick purchase (of Hollander), which we are not recommending because of the (railroad) situation, I suggest we explore with Hollander Sand the possibility of negotiating the purchase of all their sand production contingent upon (railroad) rates and as part of the sole right to retail, we include the first right of refusal to purchase their operation.

Pursuant to this plan the plaintiff made an oral agreement in September of 1973 with Hollander to buy 50,000 tons of sand per month in October, November, and December of 1973. Apparently the three-month period was decided upon because Frawley had stated it would take three months to decide whether or not to purchase Hollander.

From the beginning of October 1973 until January 1974, the plaintiff bought approximately 136,000 tons of sand. During the October to January period, it sold about 55,000 tons to its customers and transferred 4,000 tons to some of its facilities. The remaining tons were left at Hollander's plant in New Jersey. By January 1974, the plaintiff had paid for all the sand.

Sometime in late December of 1973 or early January 1974, the plaintiff decided not to purchase Hollander. The question remaining was what to do with the sand at Hollander's plant. On January 14, 1974, three of the plaintiff's representatives went to Hollander's plant. After some conversation with Hollander representatives, the plaintiff's representatives placed signs on some of the piles of sand reading: "Property of Martin Marietta Aggregates."

Between January 1 and April 30, 1974, the plaintiff sold about 9,500 tons of the sand to customers and took possession of 930 tons. In August and September of 1974, Hollander bought back 4,000 tons for cash. In October of 1974, the plaintiff surveyed Hollander's stockpiles and ascertained its inventory to be approximately 62,500 tons.

In the fall of 1974, Hollander began having trouble meeting its loan payments to the defendant. It finally defaulted, and the defendant took over the plant on December 7, 1974, giving its agent authority to sell the sand present there.

The plaintiff then began this action for conversion against the defendant. The district court held that the defendant's security interest in Hollander's inventory of sand took precedence over any rights of the plaintiff for two reasons. First, the district court held that the sand in the possession of Hollander had not been properly identified as required by the UCC so as to give the plaintiff a legally cognizable interest in it against the defendant. Second, it held that the plaintiff's purchase of the sand for the predominant purpose of keeping Hollander viable pending the plaintiff's decision whether to buy it was bad faith precluding the plaintiff's recovery as a buyer in the ordinary course under article 9 of the UCC.

Before we turn to each of these issues, we first consider the plaintiff's argument in this court that the district court was clearly erroneous in its finding as to the plaintiff's predominant intent because by January the plaintiff had decided not to buy Hollander. We are not persuaded by this argument. In August and September, the period around the time when the contract was made, the plaintiff was considering a purchase of Hollander. During that time, one of the plaintiff's employees suggested the purchase of the sand as an alternative to an immediate purchase of Hollander. Moreover, the plaintiff entered into a contract obligating it to purchase a large amount of sand over a three-month period, exactly the amount of time its employee said it would take to make a decision. Thus we do not think the district court's finding of fact on this point was clearly erroneous.

II. Identification

Where goods remain in the possession of the seller, the buyer cannot assert claims against third parties unless the goods are identified. See UCC §§ 2-722; 2-501(1). Assuming without deciding this rule would apply to a buyer's claim vis-a-vis an article 9 secured creditor, a question not directly addressed in the Code or New Jersey case law, Cf. New Jersey Study Committee Comment to N.J.Stat.Ann. § 12A:2-501, comment 2, identification can occur in one of two ways as to the type of goods here: either by express agreement of the parties or, in the absence of such an agreement, by operation of rules set out in the Code. See id. § 2-501.

The district court did not address the possibility of an express agreement, basing its holding instead on the rules that determine identification absent an express agreement. Application of these rules depends on whether the goods were existing on the date the contract was formed in September of 1973. If the goods existed in September, then identification occurred when they were "existing and identified." UCC § 2-501(1)(a). If they came into existence after September, they became identified when the seller "designated" them as the property of the buyer. Id. § 2-501(1)(b). Noting that the record was ambiguous regarding when the goods came into existence, the district court held that it made no difference because neither of the two rules was satisfied.

We need not determine whether the January placement of the signs was an express agreement within § 2-501(1) as the plaintiff argues because we find that the district court improperly applied the legal rules that operate absent an express agreement. At the outset, it is important to note the limited purpose that the identification requirement serves. The purpose of § 2-501 is to determine the point in time when the buyer has an insurable interest in the goods or a special property interest that has relevance in a variety of contexts, such as when the goods are lost or the seller becomes insolvent prior to delivery. See, e. g., UCC §§ 2-502, 2-510, 2-613; Id. § 2-501, comment 1. In light of this narrow objective, "the general policy is to resolve all doubts in favor of identification." Id. § 2-501, comment 2.

Turning to the facts here, we will assume, as did the district court, that the record is ambiguous on the question of when the sand came into existence. We therefore first consider the rule that operates if the sand existed in September. The question is how much must take place for the goods to be "existing and identified" within the meaning of § 2-501(1)(a). The district court reasoned that the January placement of the signs would be inadequate because § 2-501(1)(a) requires that the identification had to have occurred contemporaneously with the formation of the contract in September.

The comment to this provision indicates: "Undivided shares in an identified fungible bulk . . . can be sold. The mere making of a contract with reference to an undivided share in an identified fungible bulk is enough (to satisfy the rule in § 2-501(1)(a))." UCC § 2-501, comment 5. The rule stated in this passage is in accord with the general policy already noted. Although the precise terms of the oral contract are not clear on this...