Category Archives: Commercial

Second Circuit Clarifies The Merchant Entrustment Exception Under The UCC

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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 .

Insurer Seeks To Inject Itself Into Urban Outfitters Trademark Infringement Suit

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When an insurer agrees to provide a defense under a reservation of rights, or is faced with claims of potentially uncovered damages, it can end up in a very difficult position in determining its indemnity obligations at the end of the case. Many times when there is a possibility of covered and uncovered damages, the insurer is held responsible for the entire indemnity because it is not possible to distinguish between the covered and uncovered portion of damages in the judgment. This dilemma is especially acute in infringement cases where coverage is triggered under Advertising Injury Coverage.

It is apparently for this reason that Lamorak Insurance Co. recently sought to intervene in the case of Navajo Nation v. Urban Outfitters, Inc., Docket No. 1:12-cv-00195-BB-LAM, a dispute currently pending in the United States District Court for the District of New Mexico over claims of tribal trademark infringement. According to the motion papers, Lamorak is looking for the ability to have jurors answer special interrogatories “if and only if” Urban Outfitters is actually held liable for damages.

The insurance carrier wants to have the jurors be asked specifically which products, and in what years, sold by the defendants Urban Outfitters, Anthropologie and Free People, infringed on the Navajo Nation’s trademarked name and tribal pattern. Lamorak argues that this would allow it to allocate any damages awarded to the Navajo Nation and determine to what extent those damages are or are not covered under its insurance policy.

According to the motion papers, Lamorak contacted counsel for Urban Outfitters and the Navajo Nation and both of them are opposed to Lamorak’s intervention. In support of its motion to intervene, Lamorak argues that its request for intervention does not introduce any new issues into the litigation or seek a coverage determination. Lamorak also notes that it would not even need to be present at trial or be heard by a jury for its request to be entertained.

This latest development in this case, which has had a very long history, illustrates how the interests of independent or even insurance-appointed counsel can diverge from the interests of the insurance company who may be seeking to determine which, if any, of the awarded damages actually fall within coverage. It is not difficult to see how, if the request is denied, and Urban Outfitters is ultimately held liable, the insurance company could be significantly prejudiced in any subsequent coverage action.  It appears opposition papers have not yet been filed, but it will be interesting to see what arguments are raised by the parties to the lawsuit in opposition to the motion and where the Court ultimately comes down on the request to intervene.

Thanks to Maria Jorgelina Foglietta for her contribution to this post.  For more information, please email Dennis Wade at .

Federal Court Expands Definition of Merchant Under UCC’s Entrustment Rule

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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 .

Consumers Prevail in Dispute with Storage Facility (NJ)

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Limitation of liability and indemnification provisions in contract are critical to many business to limit their exposure to risk. However, many states have passed anti-indemnity legislation that prohibits or limits a party’s ability to enforce such provisions, often to protect unsuspecting consumers who later found they agreed to much more than they bargained for.

In Martinez – Santiago v. Public Storage, a class action suit was filed on behalf of nearly twenty 20,000 New Jersey consumers who leased a storage unit from Public Storage, a popular storage unit facility. This action originally stemmed from a personal injury negligence matter where the plaintiff leased a storage unit at the company’s facility. In February 2012, Santiago’s boyfriend, Orlando Colon who was listed as an “alternate contact” on the lease form, suffered spinal injuries after he slipped and fell on a patch of ice while visiting the storage unit. Colon filed a negligence suit against Public Storage, who in turned filed a third-party complaint for indemnification against Santiago pursuant to the indemnificaiton terms of her lease contract. In February 2013, a default judgment was entered against Santiago. Nearly eight months later, she retained counsel and sought to vacate the default judgment and file a third party answer and class-action counterclaim. Before the court could rule on Santiago’s motion to vacate the default judgment, Public Storage settled with Colon and voluntarily dismissed its third-party claim against Santiago.

On December 3, 2013, Santiago brought the class action lawsuit against Public Storage in the Superior Court of New Jersey, Camden County, for the company’s alleged violation of the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act (“TCCWNA”) and the New Jersey Consumer Fraud Act (“CFA”) (collectively, “Acts”). Santiago asserted that Public Storage violated the aforementioned Acts by including unenforceable exculpatory and indemnification provisions in the company’s lease contracts, as well as putting a one year time limit on the consumer’s ability to challenge any such provisions in the lease contract.

In regards to the exculpatory provision in the lease contract that required consumers to hold Public Storage harmless for injuries or damage to property for any reason, including the company’s own negligence, the court ruled that Public storage has a legal duty to maintain its premises for business invitees and businesses are in the best position to maintain their premises for the safe use of customers.

As to the indemnity provision, the Court found that the broad language required consumers to indemnify Public Storage even for its own negligence, which is prohibited in New Jersey unless the contract provides for such in unequivocal terms. Because the lease contract did not provide for indemnification for Public Storage’s own negligence in unequivocal terms, the court found it unenforceable.

Thanks to Sheri Flannery for her contribution to this post.  For more information, please write to Mike Bono.