Tanbro Fabrics Corp. v. Deering Milliken, Inc., 39 N.Y.2d 632 (1976)

A buyer in the ordinary course of business, as defined by UCC § 9-307(1), takes goods free of a security interest created by the seller, even if the buyer knows of the security interest, provided the buyer does not know that the sale violates the terms of the security agreement.

Summary

Tanbro Fabrics, a textile converter, sued Deering Milliken, a textile manufacturer, for conversion after Deering refused to release goods Tanbro had purchased from Mill Fabrics, another converter. Deering claimed a perfected security interest in the goods due to Mill Fabrics’ outstanding debt. The New York Court of Appeals held that Tanbro was a buyer in the ordinary course of business because Mill Fabrics occasionally sold excess goods to other converters, a practice known in the trade. Therefore, Tanbro took the goods free of Deering’s security interest. The court emphasized that the key is whether the sale is of the variety reasonably expected in the regular course of an ongoing business.

Facts

Deering Milliken manufactured textile fabrics and sold them to Mill Fabrics on a “bill and hold” basis, retaining a security interest in the goods to secure Mill Fabrics’ account balance.
Mill Fabrics resold some of these goods to Tanbro Fabrics, also on a “bill and hold” basis, while the goods remained in Deering’s warehouse.
Deering executives recommended that Tanbro purchase a specific blended fabric from Mill Fabrics, knowing Mill Fabrics had an excess supply.
Tanbro purchased the fabric from Mill Fabrics and paid in full, but Deering refused to deliver the remaining fabric to Tanbro due to Mill Fabrics’ outstanding debt to Deering.

Procedural History

Tanbro sued Deering in the Supreme Court and received a favorable verdict, including compensatory and punitive damages.
The Appellate Division modified the judgment, striking the punitive damages but otherwise affirming the lower court’s decision.
Both parties appealed to the New York Court of Appeals.

Issue(s)

Whether Tanbro’s purchase of the goods from Mill Fabrics was a purchase “in the ordinary course of business” under UCC § 9-307(1), thereby freeing the goods from Deering’s security interest.

Holding

Yes, because the sale was of a variety reasonably expected in the regular course of an ongoing business, and Tanbro did not know the purchase violated Deering’s security agreement. Therefore, Tanbro took the goods free of Deering’s security interest.

Court’s Reasoning

The court reasoned that UCC § 9-307(1) protects buyers who purchase goods from a seller’s inventory in the ordinary course of business. The key inquiry is whether the sale was of the variety reasonably expected in the regular course of an ongoing business. The court noted that it was customary for converters like Mill Fabrics to sell off excess goods to other converters, making the sale to Tanbro within the ordinary course of Mill Fabrics’ business, even if such sales were infrequent. The court distinguished this case from situations involving bulk sales, distress sales, or sales of commodities outside the seller’s usual inventory.

The court cited the official comment to § 9-307, stating that a sale by Mill Fabrics was impliedly authorized under the code if its indebtedness to Deering was to be liquidated. The court stated, “All subdivision (1) of section 9-307 requires is that the sale be of the variety reasonably to be expected in the regular course of an on-going business”.

Regarding punitive damages, the court found no evidence that Deering acted with wanton or willful obstruction to Tanbro’s rights, or with fraud or high moral turpitude. Deering could have believed in good faith that its security interest survived the sale. Therefore, the court upheld the Appellate Division’s decision to strike the punitive damages award.