What happens if "transaction size" is larger than "maximum block size"?
Nick Odell answers the original question: 


  The maximum transaction size is the size of the block. Source.


and


  Transactions larger than 100 kilobytes (including witness at a 75% discount rate) are non-standard. Source 1. Source 2.


so the case that you are describing will not occur as transactions lager than the blocksize will be sorted out.