Court: Court of Appeals for the Second Circuit; April 21, 2016; Federal Appellate Court
In 2003, William Goldberg Diamond Corporation (WGDC) consigned a pear-shaped diamond to fashion stylist Derek Khan, who later sold it without WGDC's permission. The diamond eventually came into the possession of Steven and Suzanne Zaretsky. Concerns about the diamond's provenance arose when Steven Zaretsky sought to insure it, leading to litigation regarding ownership. The primary legal question is whether Khan, as a merchant, had the authority to transfer WGDC's rights to the diamond under Section 2-403(2) of the New York Uniform Commercial Code (NYUCC). The district court found that Khan qualified as a "merchant" due to his specialized knowledge but did not establish that he dealt in diamond jewelry regularly, which is necessary to transfer ownership under the NYUCC. Consequently, the Zaretskys failed to present evidence that Khan regularly sold diamonds or similar high-end jewelry, negating their claim to title transfer. Additionally, the court dismissed the Zaretskys' arguments regarding the appeal's timeliness, the nature of the consignment transaction, and the laches defense as meritless. The appellate court directed the district court to grant summary judgment in favor of WGDC. The factual background includes WGDC's longstanding reputation as a diamond manufacturer and the Consignment Agreement, which explicitly prohibited Khan from selling or disposing of the diamond without WGDC's authorization.
WGDC reported the Diamond's disappearance to the New York City Police Department in February 2003 after Khan failed to return it. They hired a private investigator later that month and reported the theft to the Gemological Institute of America (GIA) on March 19, 2003. Khan was later convicted of stealing the Diamond and other items from WGDC. On March 17, 2003, Louis E. Newman, Inc. submitted the Diamond for GIA certification, unaware it was reported stolen. In late 2003, Stanley Son Jewelers, Inc. purchased the Diamond for Frank Walsh, who gifted it to his wife. Nine years later, the Walshes’ daughter, Suzanne Zaretsky, had the Diamond appraised for insurance, leading to its submission to the GIA in December 2012. The GIA then informed the Zaretskys that the Diamond was reported stolen. The GIA has retained the Diamond pending resolution of ownership.
In June 2013, the Zaretskys filed a diversity action in the District of New Jersey against the GIA, WGDC, Eve Goldberg, Louis E. Newman, Inc., and others, seeking a declaratory judgment of ownership. The case was transferred to the Southern District of New York, and the Zaretskys amended their complaint to include additional defendants. WGDC counterclaimed for ownership. After dismissing several claims, both parties filed cross-motions for summary judgment, with WGDC supporting its motion with a declaration from Eve Goldberg, asserting that Khan did not engage in any diamond transactions with WGDC.
Khan provided a declaration detailing two types of consignment agreements with jewelers: one allowing him to provide jewelry to celebrities for personal use and potential purchase, and another granting him authority to sell the jewelry directly to clients. Upon sale, he was entitled to a commission above the consignor's price. The district court's November 17, 2014, Opinion and Order addressed WGDC's claim that Khan, having allegedly stolen a diamond, could not hold or transfer title to it, asserting WGDC as the rightful owner. Conversely, the plaintiffs contended that Khan was an entrusted merchant with "voidable title," enabling him to transfer ownership under the Uniform Commercial Code (UCC). They argued that the Walshes, who purchased the diamond in 2003, obtained good title, thus negating WGDC's claim. The court's key issue was whether Khan qualified as a merchant able to pass title. It examined two UCC provisions: section 2-104(1), which defines a "merchant," and section 2-403(2), which allows a merchant to transfer rights if they deal in the relevant goods. The court determined Khan met the merchant definition based on his expertise, allowing him to transfer WGDC's rights to the diamond. Consequently, the court granted summary judgment in favor of the Zaretskys and issued a Final Order on December 12, 2014, recognizing them as the diamond's rightful owners. WGDC filed a notice of appeal on January 5, 2015, contesting this decision.
The standard of review for summary judgment decisions by the district court is de novo, requiring the appellate court to resolve ambiguities and draw factual inferences in favor of the non-moving party. Summary judgment is appropriate when there are no genuine disputes regarding material facts, and the movant is entitled to judgment as a matter of law. The Zaretskys contend that WGDC's appeal should be dismissed as untimely, arguing that the notice of appeal was filed more than thirty days after the district court's Opinion and Order. However, the Zaretskys incorrectly identify November 17, 2014, as the entry date of judgment; the judgment was only entered upon the issuance of a separate document on December 12, 2014. Therefore, WGDC’s notice of appeal filed on January 5, 2015, was timely under Federal Rule of Appellate Procedure 4(a).
The district court addressed two relevant provisions of the New York Uniform Commercial Code (NYUCC) in relation to the ownership of the Diamond—section 2-104(1) defining "merchant" and section 2-403(2) regarding the rights of a merchant to transfer goods. The court interpreted section 2-403(2) as granting any "merchant" under section 2-104(1) the authority to transfer title to an entrusted good. It found that whether Khan qualified as a merchant under the first definition—dealing in goods of that kind—was a disputed factual issue, while the third definition was not applicable due to a lack of evidence regarding an intermediary.
The district court classified Khan as a "merchant" under the second definition of section 2-104(1) of the NYUCC, allowing him to transfer rights to the Diamond under section 2-403(2). However, this interpretation is contested. Section 2-403(2) applies only to a merchant who "deals in goods of that kind," such as diamonds or high-end jewelry, which aligns with the first definition of "merchant" in section 2-104(1). The court did not determine if Khan qualified as a "merchant who deals in goods of that kind," noting a factual dispute regarding whether the Consignment Agreement allowed Khan to sell jewelry and whether he ever did. The distinction hinges on whether "dealing in" jewelry is defined by the Consignment Agreement or the parties' business practices. On appeal, both parties assert that the record supports summary judgment in their favor. WGDC argues that "dealing in" requires regular buying or selling, while the Zaretskys contend that transacting business in the industry, without necessarily selling, can also qualify as "dealing."
The New York Court of Appeals has not definitively ruled on what constitutes a merchant who "deals in goods of that kind," but persuasive authority suggests it refers to a party that regularly sells those goods. New York's Appellate Division offers relevant case law, particularly in *DiBella v. Hopkins*, emphasizing the need to follow interpretations by intermediate appellate courts unless clear evidence indicates a different stance from the Court of Appeals. In *Town of Sullivan v. Sanford Fire Apparatus Corp.*, the Third Department determined that a seller must regularly engage in the sale of specific goods to be classified as a merchant for those goods. The case involved a customized fire rescue vehicle, where the defendant, who sourced the chassis from a third party, was found not to be a merchant in chassis since they didn’t regularly sell them but only manufactured vehicles using them. This ruling equated "dealing in goods of that kind" with "selling goods of that kind," aligning with the definition of a "buyer in ordinary course of business." Additional support comes from *Toyomenka, Inc. v. Mount Hope Finishing Co.*, which also concluded that "deals in goods" implies regular engagement in sales. Other cases reinforce this interpretation, stating that merely renting or sporadically involving oneself with goods does not qualify one as a merchant. The arguments presented by the Zaretskys suggesting that one can "deal" without regular sales are deemed irrelevant, as they reference UCC provisions unrelated to the specific section in question.
In the case National Microsales Corp. v. Chase Manhattan Bank, it was established that the defendant qualified as a merchant under section 2-201 of the New York Uniform Commercial Code (UCC), concerning the statute of frauds. Similar rulings were noted in Pecker Iron Works, Inc. v. Sturdy Concrete Co. and Interested Lloyd’s Underwriters v. Ross, which defined a merchant as someone engaged in the business of selling specific types of goods. The court in the latter case found that the entrustee met this definition under section 2-403(2). Other cases, such as Davis v. Carroll, accepted parties' claims of merchant status without examining their actual dealings in the goods.
The appeal focused on whether Khan regularly sold diamonds or similar high-end jewelry, as required for establishing merchant status. The court found no evidence that Khan engaged in such sales, concluding that WGDC was entitled to summary judgment. The evidence indicated that Khan had not sold any diamonds under the consignment agreement, which restricted his authority to sell unless a written invoice from WGDC was provided. There was no substantiation of Khan's involvement in any sales of WGDC's jewelry. His self-serving declaration, which WGDC contested due to Khan's criminal background and absence, failed to demonstrate regular sales of diamonds or related goods. The declaration lacked factual support regarding Khan's sales activities, as it only referenced two consignment agreements without proving his dealings in the relevant goods, thus not creating a triable issue of fact.
Khan acted merely as an intermediary under the second type of agreement, not as a seller, and the mere expression of interest by his celebrity clients in purchasing the consigned jewelry does not prove that any sales took place. The Zaretskys cannot counter WGDC’s motion based on vague assertions. The court concluded that the Zaretskys do not need further opportunity to supplement the record with additional evidence, as both parties had previously presented their strongest evidence regarding whether Khan qualifies as “a merchant who deals in goods of that kind” under section 2-403(2). The court found no necessity to remand for further record development since the Zaretskys had obtained a declaration from Khan that clarified his business relationships with WGDC and other jewelers from 1994 to 2003. The court indicated that reversing the district court's summary judgment would be appropriate only if the issues were fully developed and no new facts could emerge. The court's conclusion aligns with the New York Court of Appeals' interpretation of section 2-403(2), which aims to enhance the reliability of commercial sales while shifting the risk of loss to the goods' owner, who can select the merchant for their property. In this case, it would be inappropriate to shift the risk of loss to WGDC, as there is no evidence that Khan regularly sold high-end jewelry. The Zaretskys' arguments for rightful ownership of the Diamond, claiming that the consignment constituted a “transaction of purchase” granting Khan voidable title and invoking the doctrine of laches against WGDC, were found to lack merit. Section 2-403(1) allows a person with voidable title to transfer good title to a good faith purchaser for value, even if the delivery was obtained through fraud.
The Fifth Circuit interprets "transaction of purchase" under Alabama’s UCC as requiring the intent of the seller to transfer ownership of goods to the buyer. In cases where goods are delivered based on fraudulent means, such as a forged check, the fraudster may hold voidable title, enabling them to pass clear title to a good faith purchaser. Conversely, if the goods are obtained through non-purchase means, the individual has void title and cannot transfer good title, even to a good faith purchaser. In the case at hand, WGDC did not intend for Khan to own the Diamond, as confirmed by the Consignment Agreement, which explicitly prohibited Khan from selling or disposing of the merchandise. Therefore, Khan could not pass good title to any subsequent purchasers. The Zaretskys argue three theories to establish a transaction of purchase: (1) voluntary delivery of the Diamond by WGDC does not satisfy the definition of "purchase" without creating property interest; (2) the assertion that WGDC retained a security interest under the NYUCC is irrelevant since there was no sale contract involved; and (3) the claim that the consignment was a conditional sale is incorrect because WGDC retained unilateral authority over any potential sale, negating the idea of a conditional transfer of title.
Khan did not acquire the Diamond through a purchase transaction, making the Zaretskys' reliance on section 2-403(1) ineffective. The Zaretskys claim the doctrine of laches applies due to WGDC's lack of diligence in locating the Diamond; however, the district court found this defense inapplicable. New York law defines laches as a delay in asserting a right that prejudices an opposing party, but the Zaretskys failed to demonstrate unreasonable delay by WGDC. Following the Diamond's disappearance, WGDC took appropriate actions by hiring an investigator, notifying the police, and reporting the theft to the GIA. The district court noted that the Zaretskys did not suffer prejudice since greater diligence by WGDC likely would not have changed the outcome. When Louis E. Newman, Inc. obtained the Diamond shortly after its loss, pursuing replevin against Khan would have been futile. The possibility of losing property acquired in good faith would remain for both the Zaretskys and the Walshes. Consequently, laches does not obstruct WGDC's claim to recover the Diamond. The district court's judgment is reversed and remanded for summary judgment in favor of WGDC. Additionally, Khan is recognized for his influence in fashion, particularly the "Bling" style, despite his past legal issues and subsequent deportation.
Claims of conversion, breach of fiduciary duty, and intentional infliction of emotional distress against the GIA were dismissed. Prior to the transfer of the case, the Zaretskys voluntarily dismissed their claims against Eve Goldberg. Following the transfer to the Southern District court, the GIA, Louis E. Newinan, Inc., and Louis Newman Company, LLC were dismissed as parties based on a stipulation, and S. S. was dismissed after its motion to dismiss was granted. The case reference is Zaretsky v. William Goldberg Diamond Corp., No. 14 Civ. 1113(SAS), with a decision dated August 18, 2014. Several unnamed defendants were never served. WGDC's notice of appeal is timely, referencing a “Final Order” from November 17, 2014, though it appears to contain a typographical error since it attached the December 12 Final Order. The substantive scope of the appeal does not affect WGDC's compliance with the filing deadline under Rule 4(a), which is deemed mandatory and jurisdictional. The parties agree on the entrusting of the Diamond by WGDC to Khan and that Frank Walsh is a "buyer in ordinary course of business," as defined in the New York U.C.C. Subsequent amendments to the NYUCC relocated the definition of "buyer in ordinary course of business." The entrusted merchant's ability to transfer rights only to a "buyer in ordinary course of business" is emphasized. A previous case, American Plastic Equipment, Inc. v. CBS Inc., involved remanding for further record development regarding whether a defendant qualified as a merchant under the NYUCC, particularly in relation to the statute of frauds.
