In December, 2014, we raised concerns with a federal district court decision which seemingly expanded the definition of a merchant who could pass title under the U.C.C.’s entrustment rule.  In that decision, Zaretsky v. The William Goldberg Diamond Corp. et al., 69 F. Supp.3d 386 (S.D.N.Y. 2014), a jeweler consigned a 7.44 carat pear-shaped diamond to a Derek Khan, a well-known fashion stylist for use in a fashion shoot.  After the shoot, Kahn stole the diamond and disappeared.

Several years later, a couple from New Jersey purchased the diamond and presented it to the Gemological Institute of America for certification.  After GIA discovered the diamond was stolen from the jeweler years before, it refused to release the diamond and litigation began between the original owner and the bona fide purchasers from New Jersey.

Normally, a thief cannot pass good title, but under the Uniform Commercial Code’s Entrustment Rule, a bona fide purchaser for value can obtain good title at the expense of the original owner if the original owner delivers the property to a merchant who deals in goods of the kind.

In the lower court, Judge Shira Scheindlin ruled Kahn qualified as a merchant who possessed knowledge or skills related to jewelry as fashion accessories which, in her view, qualified as knowledge or skills peculiar to jewelry.  This, according to Judge Scheindlin, meant that the thief could pass good title to a bona fide purchaser.

On appeal, the Second Circuit reversed that decision.  In Zaretsky v. The William Goldberg Diamond Corp. et al.,15-35, the Second Circuit did not take issue with Judge Scheindlin’s ruling that Khan qualified as a merchant by virtue of his specialized knowledge.  Rather, the court held that to qualify as merchant who can pass good title under the merchant entrustment rule, the merchant in question must be a merchant who “deals in goods of the kind” under UCC §2-403(2).  On this point, the Second Circuit held that Khan was not a merchant who dealt in goods of the kind because he was not someone who “regularly sells those goods of that kind.”  Because there was no evidence that Kahn was engaged in the business of selling jewels, the court held he did not qualify as a merchant who could pass good title to a bona fide purchaser at the expense of the true owner.

When Judge Scheindlin issued her decision, we reported that the decision was troubling for insurers because it meant that a dealer engaged in one kind of business could qualify as a merchant in a different kind of business, thus expanding the class of persons who could convey good title at the expense of an original owner.  With its recent decision, however, the Second Circuit restored the legal protection traditionally afforded to a true owner.  For that reason, it is welcome news to insurers as well.

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