Tumber v. Automation Design & Mfg. Corp.

Citations: 130 N.J. Super. 5; 15 U.C.C. Rep. Serv. (West) 583; 324 A.2d 602; 1974 N.J. Super. LEXIS 508

Court: New Jersey Superior Court Appellate Division; August 2, 1974; New Jersey; State Appellate Court

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The case involves a dispute between the plaintiff-owner of certain machinery and a lessee who claims ownership through the entrustment provisions of N.J.S.A. 12A:2-403(2) and the doctrine of estoppel. The plaintiff seeks the return of the goods or their reasonable value. The background includes a 1967 purchase of machinery by Joseph J. Solon, operating as AAA Machinery Co. (AAA), from S. J. Dolce Co., Inc., with payment made by Donlon Ventures, Inc., in which Solon and his brother-in-law Albert E. Tumber were partners. Title to the goods was assigned to AAA by Solon. 

Solon contracted with Roto American Corp. (R.A.C.) to supply machinery, while R.A.C. faced financial difficulties leading to asset liquidation. Roto American Sales Corp. (R.A.S.C.) was formed to act as R.A.C.'s agent, obtaining rights to R.A.C.'s interests through Solon’s efforts. R.A.C. had a mortgage lien on its assets and allowed various parties to use its facilities. 

In June 1967, AAA leased several machines to R.A.S.C. under a rental agreement with an option to purchase, but Solon later indicated that the lease was never finalized, and the equipment was left with the understanding it would be sold later. R.A.C. filed for bankruptcy in September 1967, leading to the cancellation of the assignment between R.A.C. and R.A.S.C. Subsequently, R.A.S.C. became the majority shareholder of Roto American Corp. as part of an emergency measure to stabilize R.A.C. The case highlights the complexities surrounding asset ownership, leasing agreements, and the ramifications of bankruptcy proceedings.

R. A. S. C. was utilized to settle creditor claims, with Solon acting as an intermediary in the process. In April 1968, Carl Frank, president of Automation Design, leased part of R. A. C.'s building, having known Solon from his previous role at R. A. C. Frank rented the space in April 1968, took possession in May, and remained until April 1970. In late 1968, Dolce and Billington proposed selling four machines to Automation Design; Frank had earlier discussed the purchase of machinery with Solon but did not finalize a price. Ultimately, Frank acquired a Leland Gifford Drill Press via a check dated November 26, 1968, and three other machines through cash checks labeled for payroll purposes.

The first significant transaction happened on December 6, 1968, when Frank paid $3,750 in cash for a Sigma Radial Drill after consulting with John Sweeney, the lien holder. He received an invoice from R. A. S. C. certifying the machine was free of encumbrances, signed by Herbert Billington. Frank was reassured by Herbert Frutkin, R. A. S. C.'s sole stockholder, that Solon did not own the machine. The second purchase on December 13, 1968, involved a LeBlond Regal Lathe and a Bridgeport Milling Machine, bought for $3,500 in cash due to Dolce and Billington's urgent need for payroll funds. Frank received invoices for these purchases a week later, which contained notations indicating the machines were associated with AAA, suggesting Solon's ongoing agency role and intent to sell the equipment in the future.

In late 1968, the IRS tagged R. A. C.'s assets under lien, but Frank insisted on removing the tags. On December 29, 1968, Albert Tumber informed the IRS that the goods belonged to him but were being utilized by Dolce-Helix Corp. with plans for sale to R. A. C.

On November 2, 1970, attorney Melvin A. Albert, representing AAA, demanded the return of the Sigma Radial Drilling Machine from Automation Design, which subsequently denied AAA's ownership claim on November 9, 1970. AAA then initiated a lawsuit for the return of three pieces of equipment. Under New Jersey Statutes Annotated (N.J.S.A.) 12A:2-403, the law allows a merchant who receives goods to transfer ownership rights to a good faith buyer in the ordinary course of business, irrespective of any conditions between parties. The definition of "merchant" requires regular engagement in selling those goods. 

A "buyer in ordinary course of business" is defined as someone who purchases goods in good faith without knowledge of any third-party ownership claims, excluding pawn brokers. Courts have established that merchants must meet heightened good faith standards, being honest and adhering to reasonable commercial practices. In this case, although Frank acted in good faith when purchasing the equipment, this did not qualify him as a buyer in the ordinary course because his seller, R. A. S. C., did not meet the necessary merchant standards, and Frank's lack of further ownership proof inquiry was not commercially reasonable.

Nevertheless, a purchaser can still be a good faith buyer for value, protected under common law estoppel, even if they do not qualify as a buyer under the Uniform Commercial Code. The legal principle suggests that between two innocent parties affected by fraud, the one who created the circumstances enabling the wrongful act bears the loss.

In 1967, AAA leased machines to R. A. S. C., but the lease was never finalized, and AAA allowed Dolce and Billington to use the equipment while it was stored at the R. A. C. building. In 1968, Automation Design occupied the building and purchased the equipment after receiving title assurances from Dolce, Billington, Frutkin, and John Sweeney at New Jersey Bank. For over a year, the equipment remained with R. A. S. C., which had an option to purchase, and then stayed with Automation Design for an additional two years. The first demand for the equipment was made in November 1970, seven months after Automation Design moved the equipment to Norwood. The court determined that Frank, having previously dealt successfully with the sellers, acted in good faith and without notice, justifying his reliance on their authority to sell. Consequently, the court found Solon responsible for enabling the wrongful act and ruled he should be estopped from claiming title. A judgment was entered in favor of the defendant for possession of the equipment, and the counterclaim was denied.