Zaretsky v. William Goldberg Diamond Corp.
2014 U.S. Dist. LEXIS 161470, 85 U.C.C. Rep. Serv. 2d (West) 198, 69 F.Supp. 3d 386 (2014)
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Rule of Law:
Under UCC § 2-403, a person is considered a "merchant" if, by their occupation, they hold themselves out as having knowledge or skill peculiar to the goods involved, even if that knowledge is aesthetic rather than commercial. Entrusting goods to such a merchant gives them the power to transfer all rights of the entruster to a buyer in the ordinary course of business.
Facts:
- William Goldberg Diamond Corporation (WGDC) consigned a 7.44-carat diamond to Derek Khan, a well-known celebrity fashion stylist.
- The purpose of the consignment was for Khan to use the jewelry to adorn his celebrity clients for special events and fashion shoots.
- The consignment agreement specified that Khan had no authority to sell the diamond unless he received a separate, specific invoice from WGDC for a sale.
- Khan never received such an invoice but failed to return the diamond after the consignment period.
- The diamond subsequently entered the legitimate market when it was submitted for certification by Louis Newman, a diamond merchant.
- Another diamond merchant, Stanley & Sons, purchased the diamond on behalf of Frank and Donna Walsh.
- The Walshes later conveyed the diamond to their children, the plaintiffs in this case.
Procedural Posture:
- The plaintiffs, current possessors of the diamond, filed a lawsuit in the U.S. District Court for the Southern District of New York to determine rightful ownership.
- The defendant, William Goldberg Diamond Corporation (WGDC), counter-claimed, asserting it was the true owner.
- Both the plaintiffs and WGDC filed cross-motions for summary judgment, asking the court to rule in their favor as a matter of law.
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Issue:
Does a celebrity fashion stylist, who has specialized knowledge of jewelry for fashion purposes but is not in the business of buying or selling it, qualify as a 'merchant' under UCC § 2-403, thereby having the power to transfer good title of a consigned diamond to a good faith purchaser?
Opinions:
Majority - Scheindlin, J.
Yes. A person qualifies as a 'merchant' under the Uniform Commercial Code if by their occupation they hold themselves out as having specialized knowledge or skill regarding the goods, which gives them the power to transfer good title. The court reasoned that the UCC provides two definitions for a 'merchant': one who 'deals in goods of the kind,' and one who 'by his occupation, holds himself out as having knowledge or skill peculiar to the practices or goods involved.' While it was a disputed fact whether Khan 'dealt in' jewelry, the court found he unquestionably qualified under the second definition. As a celebrity stylist, Khan's occupation required him to have and hold himself out as having specialized knowledge and aesthetic skill regarding jewelry. This interpretation is consistent with the purpose of the merchant entrustment rule, which is to protect innocent purchasers by placing the risk of loss on the owner who chooses the person to whom they entrust their property. Therefore, because WGDC entrusted the diamond to Khan, who qualified as a merchant, Khan had the power to transfer good title to a buyer in the ordinary course of business, and the plaintiffs are the rightful owners.
Analysis:
This decision significantly broadens the definition of 'merchant' for the purposes of the UCC's entrustment rule. It establishes that specialized knowledge does not need to be commercial or related to the business of buying and selling; aesthetic or practical expertise derived from one's occupation is sufficient. This ruling increases protection for good faith purchasers while shifting a greater burden of risk onto original owners. Owners must now be cautious when entrusting goods to any professional with specialized knowledge in the field, such as stylists, designers, or consultants, as these individuals may be deemed 'merchants' capable of transferring title.
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