Zaretsky v. William Goldberg Diamond Corp.

United States Court of Appeals, Second Circuit
F.3d (2016)

ELI5:

Rule of Law:

Under New York's Uniform Commercial Code § 2-403(2), for an entrustee to have the power to transfer good title of entrusted goods, the entrustee must be a merchant who is regularly engaged in the business of selling goods of that kind. Merely possessing skill or knowledge peculiar to the goods is insufficient to meet this standard.

Facts:

From 2002 to 2003, William Goldberg Diamond Corporation (WGDC), a diamond wholesaler, consigned millions of dollars' worth of jewelry to Derek Khan, a celebrity fashion stylist, for his clients to wear at events.
In February 2003, WGDC consigned a 7.44-carat pear-shaped diamond pendant to Khan under a written agreement.
The consignment agreement explicitly stated it was not a bill of sale and that Khan acquired no authority to sell, pledge, or otherwise dispose of the merchandise.
Khan, without permission and in violation of the agreement, sold the diamond to a third party.
Khan subsequently failed to return the diamond, and WGDC reported it as stolen to the police and the Gemological Institute of America (GIA).
After a series of transfers over nine years, the diamond came into the possession of Steven and Suzanne Zaretsky in August 2012 as a gift from family.
When Steven Zaretsky submitted the diamond to the GIA for appraisal in December 2012, the GIA identified it as the diamond reported stolen by WGDC.

Procedural Posture:

The Zaretskys filed a diversity action in the U.S. District Court for the District of New Jersey against WGDC and others, seeking a declaratory judgment that they held clear title to the diamond.
The case was transferred to the U.S. District Court for the Southern District of New York upon WGDC's motion.
WGDC filed a counterclaim against the Zaretskys, seeking an order establishing its rightful ownership.
After discovery, the Zaretskys and WGDC filed cross-motions for summary judgment.
The district court granted summary judgment in favor of the Zaretskys, ruling that Khan qualified as a 'merchant' under the UCC and therefore had the power to transfer WGDC's title.
WGDC, as appellant, appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Second Circuit; the Zaretskys were the appellees.

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Issue:

Does a celebrity stylist, who is not regularly engaged in selling high-end jewelry, qualify as a 'merchant who deals in goods of that kind' under NYUCC § 2-403(2), thereby gaining the power to transfer an original owner's title to a diamond entrusted to him?

Opinions:

Majority - Sack, Circuit Judge

No. A person does not qualify as a 'merchant who deals in goods of that kind' under NYUCC § 2-403(2) unless they are regularly engaged in selling goods of the kind in question. The court rejected the district court’s reasoning that qualifying as a 'merchant' under any of the broader definitions in § 2-104(1) is sufficient for the entrustment rule to apply. Section 2-403(2) contains the more specific and controlling requirement that the merchant must 'deal in goods of that kind.' Citing persuasive authority, the court defined this phrase to mean one who regularly sells such goods. The Zaretskys failed to present any evidence that Khan was in the business of selling diamonds or other high-end jewelry; his role was as a stylist, and at most he acted as an occasional go-between. Because Khan did not regularly sell diamonds, he lacked the power to transfer WGDC's title, and all subsequent purchasers, including the Zaretskys, could not acquire good title.

Analysis:

This decision clarifies and narrows the scope of the UCC's entrustment provision, establishing that a merchant's general expertise is not enough to empower them to transfer title. The ruling emphasizes that the specific business practice of regularly selling the goods in question is the determinative factor. This interpretation shifts the risk of loss away from owners who entrust goods for non-sale purposes (like exhibition or repair) and onto buyers who purchase from intermediaries not known to be regular sellers. Consequently, future courts and purchasers must scrutinize the actual business operations of an entrustee, not just their occupational status or knowledge.

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