Mellen, Inc. v. Biltmore Loan & Jewelry-Scottsdale, LLC
247 F. Supp. 3d 1084 (2017)
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Rule of Law:
A person who obtains possession of goods without any intent from the owner to transfer title, such as through a memorandum agreement strictly for inspection, acquires void title and cannot transfer good title to a subsequent purchaser, even a good faith purchaser for value, under UCC § 2-403.
Facts:
- In June 2013, Mellen, Inc., a wholesale diamond dealer, acquired a flawless, four-carat blue heart-shaped diamond.
- On January 23, 2015, Mellen delivered the diamond to Scott Meyrowitz, another diamond dealer, under a 'memorandum agreement'.
- The agreement stated the diamond was delivered 'only for examination and inspection by prospective purchasers' and that Meyrowitz acquired 'no right or authority to sell, pledge, hypothecate or otherwise dispose of the merchandise'.
- Around the same time, Meyrowitz introduced Joe Gutekunst, who falsely purported to own the diamond, to David Goldstein, the owner of Biltmore Loan and Jewelry.
- On March 2, 2015, Gutekunst pawned the diamond to Biltmore for a $1 million loan.
- Biltmore wired the $1 million to Gutekunst, who immediately transferred $955,000 of it to Meyrowitz.
- On November 18, 2015, Biltmore purchased the diamond outright from Gutekunst for a sale price of $1.3 million, which consisted of forgiving the $1 million loan and paying an additional amount.
Procedural Posture:
- Mellen, Inc. filed a complaint in U.S. District Court against Biltmore Loan and Jewelry asserting claims for declaratory judgment, replevin, and conversion.
- Biltmore alleged counterclaims for slander and tortious interference.
- The trial court issued a preliminary injunction preventing the sale or transfer of the diamond pending the outcome of the case.
- Both Mellen and Biltmore filed cross-motions for summary judgment with the district court.
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Issue:
Does a pawnbroker obtain good title to a diamond purchased from an individual who acquired it from a dealer, when the original owner had given the dealer possession only for inspection purposes under a restrictive memorandum agreement that explicitly prohibited any sale or pledge?
Opinions:
Majority - Douglas L. Rayes
No, a pawnbroker does not obtain good title under these circumstances. The court reasoned that Biltmore failed to acquire good title under three different UCC theories. First, under UCC § 2-403(1), Meyrowitz did not obtain the diamond through a 'transaction of purchase' because the memo agreement explicitly stated Mellen retained ownership and Meyrowitz had no authority to sell. Therefore, Meyrowitz had void title, not voidable title, and could not pass good title to anyone. Second, the 'entrustment rule' of UCC § 2-403(2) fails because Mellen entrusted the diamond to Meyrowitz, but Biltmore purchased it from Gutekunst, who was not a 'merchant who deals in goods of that kind.' Furthermore, Biltmore was not a 'buyer in the ordinary course of business' because it first acquired the diamond as security for a loan. Third, the transaction was not a 'consignment' under UCC Article 9 because the memo expressly prohibited sale, meaning the diamond was not delivered 'for the purpose of sale.'
Analysis:
This decision reaffirms the critical distinction between void and voidable title under the UCC. It clarifies that protections for good faith purchasers are not absolute and do not cure a complete lack of title in the transferor. The case serves as a precedent underscoring that courts will strictly interpret agreements like diamond memoranda, and the specific terms of such agreements can prevent the application of doctrines like entrustment or consignment. The ruling places a significant burden of due diligence on buyers, especially in non-traditional sales, to verify that the seller is a legitimate merchant with the authority to sell the goods, rather than merely possessing them.
