Overview
In an opinion yesterday, Judge Scheindlin granted summary judgment to two plaintiffs who sought to confirm their rightful ownership of a 7.44 carat diamond. The original owners (referred to as “WGDC”) had lent the diamond to a stylist named Derek Khan, who was in the business of arranging for celebrities to wear his clients’ jewelry, and who apparently stole the diamond at some point in the past. Under the UCC’s “merchant entrustment” rule, an owner who entrusts goods to a “merchant” -- someone who (1) “deals in goods of the kind” or (2) “"holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction” -- bears the risk of an improper sale to innocent third parties. WGDC argued that Mr. Khan could not be a "merchant" because he was in the fashion business, not in the business of buying and selling diamonds, but Judge Scheindlin disagreed:
[N]othing in the language of the UCC suggests that the phrase "knowledge or skill peculiar to the practices or goods involved in the transaction" necessarily refers to knowledge of, or skills related to, the business dimension of those "practices or goods." If anything, the UCC's bifurcated. definition of "merchant" cuts the other way. That the UCC differentiates between "deal[ing] in goods" and possessing "knowledge or skill [about] goods" suggests that the latter definition is not exclusively concerned with business knowledge. Khan obviously had "knowledge [and] skill[s]" related to jewelry. Absent explicit guidance from New York courts, I conclude that Khan's particular type of "knowledge [and] skill[ s ]" -- related to aesthetics, not business -- is covered by the UCC's broad definition. WGDC has not identified any case that holds otherwise. And more importantly, rejecting this broad definition would undermine the spirit of the merchant entrustment rule, which aims to protect purchasers by "shifting the risk of loss through fraudulent transfer to the owner of the goods, who can select the merchant to whom he entrusts his property." The rationale behind the rule, in other words, is to "enhance[] confidence in commercial transactions by protecting the innocent purchaser who buys from a merchant dealing in goods of that kind" -- which counsels in favor of giving "merchant" a broad definition, to the benefit of purchasers, not owners. It is undisputed that plaintiffs came into the possession of the diamond innocently. And it is also clear that if the merchant entrustment rule applies -- to protect plaintiffs' innocent acquisition -- WGDC will be left to bear an unfortunate liability. Such is the nature of a case like this, where the true perpetrator -- Khan -- is beyond the Court's grasp. There can be no doubt that Khan's actions were larcenous. However, because he falls within the broad definition of "merchant" set out in the UCC, his larceny did not preclude him from passing title. I conclude, therefore, that plaintiffs are the rightful owners of the diamond.
