APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civ. No. 75-0644)
Before Seitz, Chief Judge, Aldisert, Circuit Judge, and Huyett, District Judge.*fn*
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).*fn1
Hollander Sand Associates (Hollander)*fn2 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 ...