Zaretsky v. William Goldberg Diamond Corp.

Citations: 69 F. Supp. 3d 386; 85 U.C.C. Rep. Serv. 2d (West) 198; 2014 U.S. Dist. LEXIS 161470; 2014 WL 6469083Docket: No. 14 Civ. 1113(SAS)

Court: District Court, S.D. New York; November 16, 2014; Federal District Court

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Ownership of a 7.44 carat pear-shaped diamond is disputed in this case, with the Gemological Institute of America (GIA) holding it pending a title determination. The diamond was consigned in February 2003 by the William Goldberg Diamond Corporation (WGDC) to Derek Khan, a celebrity fashion stylist, as part of an ongoing arrangement. The Consignment Agreement stipulated that Khan could not sell the diamond without prior approval and specific terms from WGDC. Despite this, Khan failed to return the diamond promptly, leading WGDC to file a police report. On March 17, 2003, the diamond was introduced to the market when Louis Newman submitted it to the GIA for certification. It was later sold to Stanley Sons on behalf of Frank and Donna Walsh, who eventually passed it on to their children.

WGDC claims ownership, arguing that Khan's actions constituted theft, preventing him from transferring title legally. Conversely, the plaintiffs maintain that Khan was an entrusted merchant with voidable title under the Uniform Commercial Code (UCC), allowing for the transfer of title when the Walshes bought the diamond, thus claiming WGDC no longer holds ownership rights. The plaintiffs also argue that WGDC's replevin action is barred by laches due to significant delays. Both parties sought summary judgment on their claims. The court granted the plaintiffs' motion and denied WGDC's, indicating that there were no genuine issues of material fact that would warrant a trial.

Under New York law, an entrustee, who is someone entrusted with property, holds a voidable title, allowing them to pass good title to a third party. According to Section 2-403(2) of New York’s UCC, when goods are entrusted to a merchant, that merchant can transfer all rights of the owner to a buyer in the ordinary course of business. This means that if an owner entrusts property to a merchant, they cannot later seek replevin against a good faith purchaser, even if the sale involved fraud. The merchant entrustment rule aims to enhance the reliability of commercial transactions by shifting the financial risk from buyers to owners who leave their property with merchants. Owners who knowingly deliver property to a merchant assume the risk of the merchant's potential unscrupulous actions, emphasizing the importance of choosing trustworthy merchants. The definition of a "merchant" under the UCC includes those who deal in specific goods or those who possess specialized knowledge or skills related to the goods or practices involved in the transaction.

WGDC voluntarily consigned a diamond to Khan under a Consignment Agreement, but there is a dispute over the purpose of this consignment. WGDC claims the diamond was entrusted solely for Khan to use as a fashion stylist for celebrity clients, while the plaintiffs assert that Khan had conditional authority to sell the diamond, thus acting as a broker and qualifying as a "merchant" under the UCC. The nature of the relationship between WGDC and Khan remains a disputed fact that the Court cannot resolve at this stage; however, it is established that Khan qualifies as a "merchant" under the UCC's second definition due to his occupation as a fashion stylist, which necessitated knowledge and skill related to jewelry.

WGDC's arguments against this classification center on Khan being a stylist rather than a jeweler and not being involved in the jewelry trade at wholesale or retail levels. However, the UCC’s definition of "merchant" includes individuals with knowledge or skills about goods, regardless of their involvement in the business aspect. Khan’s expertise in selecting jewelry for fashion purposes demonstrates that he indeed possessed such knowledge, which is relevant under the UCC. 

Rejecting a broad interpretation of "merchant" would undermine the merchant entrustment rule, designed to protect innocent purchasers by shifting the risk of loss from fraudulent transfers to the property owner. Since the plaintiffs obtained the diamond innocently, and Khan's actions, albeit larcenous, do not prevent him from passing title under the UCC, the plaintiffs are deemed the rightful owners of the diamond.

Plaintiffs’ motion for summary judgment has been granted, while WGDC’s motion for summary judgment has been denied. The Clerk of the Court is instructed to close both motions numbered 174 and 183. The court presumes familiarity with the procedural history of the case and does not reiterate it. Evidence includes the Consignment Agreement between William Goldberg Diamond Corporation and Derek Khan, as well as various statements and affidavits regarding the diamond’s theft and subsequent certification. WGDC reported the diamond stolen shortly after it was submitted for certification, but the similarity between the two diamonds was not recognized at that time. The court finds that plaintiffs succeed on the merits, making a ruling on the laches argument unnecessary; however, it notes the brief time frame between the diamond’s theft and its purchase complicates the 'prejudice' requirement of laches.

Plaintiffs' assertion that WGDC lacked reasonable diligence in locating the diamond post-March 2003 is considered, yet it is uncertain if more effort would have yielded different results. After Newman acquired the diamond shortly after WGDC's loss, pursuing replevin against Khan was deemed futile. Subsequently, the Walshes' purchase of the diamond would subject plaintiffs to similar risks of losing property acquired in good faith. WGDC's actions included hiring an investigator, notifying law enforcement, and reporting the diamond as stolen to the GIA. The lack of further action within ten months, in the absence of a matching report from the GIA, does not necessarily indicate a failure to protect its rights.

This case, being a diversity action, applies New York law. Under the UCC, a "buyer in the ordinary course of business" is defined as someone who buys goods in good faith without knowledge of any rights violations. The court notes that Khan’s status as a merchant hinges on whether he employed an agent with relevant knowledge, which hasn't been established. The Consignment Agreement implies that Khan could sell jewelry with WGDC's approval, but there is no evidence he actually sold any consigned items. The core factual issue revolves around whether the definition of dealing in jewelry is determined by the Consignment Agreement or the established business practices between the parties.

Under N.Y.U.C.C. 2-104(1), the defendants oppose the plaintiffs' motion for summary judgment, referencing Derek Khan's declaration and a supporting declaration from Goldberg. WGDC cites two cases from Tennessee and Texas, both jurisdictions having adopted similar UCC provisions. In *Brooks Cotton Co. v. Williams*, the Tennessee Court of Appeals remanded the issue of the defendant's status as a "merchant" without providing clear support for WGDC's position. Conversely, the Texas case, *Nelson v. Union Equity Co-operative Ex.*, determined that a farmer qualified as a merchant based on his expertise in wheat production, regardless of his sales experience, suggesting that knowledge in a specific field suffices for merchant classification. This finding arguably undermines WGDC's argument. Additionally, the only relevant authority from the same district, *Brown v. Mitchell-Innes, Nash*, supports the plaintiffs' stance, as the court recognized art collectors as merchants due to their expertise in the art industry, despite not being involved in sales.