Zaretsky v. William Goldberg Diamond Corp. - 820 F.3d 513 (2d Cir. 2016)

Rule:

N.Y. U.C.C. Law § 2-403(2) enables a merchant to transfer rights to an entrusted good only if the person is a merchant who deals in goods of that kind. This entrustment provision therefore applies to a person who is a "merchant" under N.Y. U.C.C. Law § 2-104(1)'s first definition, which itself includes the requirement that the person be one who "deals in" the relevant good. But N.Y. U.C.C. Law § 2-403(2) does not necessarily apply to a person who is a "merchant" under the second or third definitions. To qualify as a merchant under those definitions, the person or entity need not deal in goods of that kind, yet that is a prerequisite to being deemed a merchant with the power to transfer rights to entrusted goods to a buyer under N.Y. U.C.C. Law § 2-403(2).

Facts:

In 2003, the appellant William Goldberg Diamond Corporation ("WGDC") consigned a large pear-shaped diamond to Derek Khan, a celebrity fashion stylist. Khan, without WGDCs permission, subsequently sold the diamond to a third party. Through a series of transfers, the diamond ultimately came into the possession of the appellees Steven Zaretsky and Suzanne Zaretsky (the "Zaretskys"). Steven Zaretsky authorized another jeweler to appraise the Diamond for insurance purposes. On December 10, 2012, that jeweler submitted the Diamond to the GIA for certification. Soon thereafter, the GIA informed the Zaretskys that the Diamond appeared to have been stolen from WGDC in 2003. The GIA has retained possession of the Diamond pending a final resolution of its rightful owner. In 2013, the Zaretskys brought a diversity action against the GIA, WGDC, Eve Goldberg (Vice President of WGDC), Louis E. Newman, Inc., and several unidentified "John Doe" and "ABC Corporation" defendants. The Zaretskys sought, among other relief, a declaratory judgment to the effect that they hold proper title to the Diamond. The trial court adjudged the Zaretskys to be the rightful owners of the Diamond. According to the trial court, Khan had the power to transfer WGDC’s rights to the diamond under section 2-403(2) because, by his occupation, he clearly held himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. The WGDC filed a notice of appeal, contesting the district court's summary judgment decision.

Issue:

Was Derek Khan, the celebrity fashion stylist, “dealing in goods” of the kind involved in the transaction, within the meaning of Section 2-403(2) of the New York Uniform Commercial Code (the “NYUCC”), and could therefore effectively transfer WGDC’s rights to the diamonds?

Answer:

No.

Conclusion:

The Court noted that Section 2-403(2) of the New York Uniform Commercial Code (the "NYUCC") provided that “any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business." According to the Court, the phrase “dealing in goods of that kind” meant the regular sale of the kind of goods involved in the transaction, i.e., jewelries or diamonds. In this case, the Court held that the Zaretskys failed to raise a triable issue of fact as to Khan’s capacity to transfer title to jewelry held on consignment because there was no evidence that the latter regularly sold diamonds or other high-end jewelry such that he was a "merchant" under N.Y. U.C.C. Law § 2-403(2). Moreover, the consignment was not a "transaction of purchase" under N.Y. U.C.C. Law § 2-403(1), because it was clear from the record that WGDC never intended for Khan to become the owner of the diamond that was entrusted to him. Accordingly, the judgment was reversed and the case was remanded.