ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY C.A. No. 75-0644
Before Adams, Rosenn and Higginbotham, Circuit Judges.
This diversity case, in which the parties agree that the law of New Jersey governs, involves a dispute over 62,443 tons of sand. The plaintiff, Martin Marietta Corporation, purchased approximately 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 control of the sandplant and authorized its agent to sell the sand located there. Martin Marietta, claiming that the Bank sold its sand, brought suit for conversion.
After a bench trial, the late Judge Barlow found for the Bank on two grounds. First, it held that the sand claimed by Martin Marietta had not been identified to the contract, a necessary prerequisite under the Uniform Commercial Code to asserting claims against third parties, in this case the Bank, when the goods in question have remained in the possession of the seller. N.J.S.A. 12A: 2-722. Second, Judge Barlow held that Martin Marietta did not meet the good faith requirement of a "buyer in the ordinary course of business," and therefore could not take priority over the Bank's perfected security interest as provided in N.J.S.A. 12A:9-307.
We reversed on both grounds. First, we 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, 749-51 (3d Cir. 1979). Thus, we declared, Martin Marietta was entitled to assert a claim against the Bank, a third party, even though Martin Marietta had left the sand in question in the possession of the seller, Hollander.
Second, we held that the district court erred in ruling that Martin Marietta failed to satisfy the good faith standard. Under N.J.S.A. 12A:9-307, a "buyer in the ordinary course of business" takes free of a perfected security interest. A "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.
On the prior appeal, we considered two elements, "good faith" and "buying in the ordinary course," to be critical in determining whether Martin Marietta satisfied the definition set forth in 1-201(9). Adopting a subjective standard, we stated that, in this case, the question of good faith turned on whether the plaintiff knew that the sale of sand was not in the ordinary course. Martin Marietta, 612 F.2d at 753. But this question, in turn, depended on whether in fact the sale was not in the ordinary course. We, 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, we remanded the case for consideration on that theory and any other theory that may be applicable. Martin Marietta, 612 F.2d at 754.
When the case returned to the district court, the parties agreed to a trial on the record as established. Judge Ackerman, who replaced Judge Barlow, concluded in a comprehensive opinion that the transaction between Martin Marietta and Hollander did not constitute a bulk transfer because the sale was in the ordinary course of the business of Hollander. Martin Marietta's rights in the sand therefore took precedence over the Bank's security interest. The district court, 505 F. Supp. 946, also considered the Bank's defenses under N.J.S.A. 12A:2-712, concluding that the facts did not support the defenses raised. Accordingly, the district court held the Bank liable to Martin Marietta for conversion of the sand. The Court entered judgment in the amount of $92,835.00 in favor of Martin Marietta against the Bank, plus $40,847.40 in pre-judgment interest.
The present appeal confronts us with the following issues: (1) whether the district court erred in concluding that the transaction between Martin Marietta and Hollander was not a bulk transfer; (2) whether Hollander's continued possession of the sand that it had sold to Martin Marietta was fraudulent; (3) whether damages should have been awarded based on 61,890 tons or a lesser amount of sand; (4) whether plaintiff had a duty to "cover"; and (5) whether the district court properly awarded prejudgment interest.
We affirm the judgment in all respects except as to plaintiff's duty to cover; on this point, we remand.
A "bulk transfer" is defined in N.J.S.A. ...