Hollywood types and would-be celebrities regularly solicit high-end jewelers for baubles to enhance fashion shoots or frankly to make them look better at, say, the Oscars. It is win-win: The stylist gets the look and the jeweler may get some free publicity. So nothing seemed out of the ordinary when, in 2003, fashion stylist Derek Khan asked The William Goldberg Diamond Corporation for a necklace featuring a 7.44 carat pear shaped diamond certified by the Gemological Institute of America. As is customary, the entrustment was memorialized in a written consignment agreement prohibiting Kahn from selling the piece. But after the shoot, Kahn stole the diamond and disappeared. Goldberg filed a police report and notified the GIA of the theft.

Fast forward nine years later, the purchasers of the diamond, nice folks from New Jersey, presented the diamond to GIA for re-certification. Because of the reported theft, GIA refused to release the diamond and notified Goldberg. Goldberg expected to get the diamond back because a thief cannot pass good title.  But in Zaretsky v. The William Goldberg Diamond Corp., et al.., 14 Civ. 1113 (SAS),  Judge Shira Scheindlin of the U.S. District Court for  the Southern District of New York saw things differently, finding that Kahn qualified as a “merchant” under the UCC capable of conveying good title to a good faith purchaser.

Under the UCC, a good faith purchaser can obtain title at the expense of the original owner if the owner knowingly delivers the property to a merchant.  Merchant status can be conferred in one of two ways.  An entrustee is a merchant if he deals in goods of the kind, or if by his occupation, he holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction.

In Zaretsky, Judge Scheindlin reasoned that Khan was a merchant because fashion stylists like Kahn have knowledge or skills related to jewelry as accessories to fashion, and therefore, had knowledge or skills peculiar to jewelry.  According to Judge Scheindlin, “Khan’s particular type of knowledge and skills – related to aesthetics, not business, is covered under  the UCC’s broad definition” of merchant.  But this broad holding seems at odds with the Court’s own acknowledgement that the purpose of the provision was to “enhance the reliability of commercial sales by merchants who deal in the kind of goods sold” and to “protect buyers in the ordinary course of business.”

It also seems at odds with the cases cited by the Court as analogous.  Judge Scheindlin relied on  Brooks Cotton Co. v. Williams, a Texas Court of Appeals case in which a farmer was held to be a merchant by virtue of his knowledge of wheat farming even though the farmer was not a wheat farmer, as well as Brown v. Mitchell-Innes & Nash, a Southern District of New York case in which the court held that art collectors could be considered art merchants even though they did not sell art.  Unlike Khan, however, the merchants in those cases were actually involved in the businesses at issue, art and farming, rather than tangentially related to a different kind of business.

Zaretsky is a troubling decision for insurers because it expands the definition of “merchant” in two respects.  First, it is no longer necessary for a merchant to possess business knowledge; mere “aesthetic” knowledge may now suffice.  Second, someone engaged in one business may now qualify as a merchant in a different kind of business.  If Zaretsky survives appeal, it will change the definition of who can convey good title, making it more difficult for owners and their insurers to recover stolen property.

Thanks to Michael Gauvin for his contribution to this post.  For more information, please email Dennis Wade at .