Any insurer who has paid a claim arising from the theft of fine art, diamonds, jewellery, or other valuable personal property is likely familiar with the well tread doctrine of property law which holds that a thief cannot pass good title.  In the context of recovery efforts, subrogated insurers have used this doctrine to their benefit for hundreds of years.  In New York, it is still the law that a thief cannot pass good title, and when a subrogated insurer is litigating the ownership rights to a piece of art or a diamond that resurfaces years after its theft from the insured, most often recovery will depend on the application of that rule. 

When it comes to passing good title, however, not all thefts are created equal.  New York statutory law, under s 2-403(2) of the Uniform Commercial Code (UCC) carves out what can essentially amount to an exception to the general rule that a thief cannot pass good title.  Under UCC s2-403(2), if goods are entrusted to a merchant who deals in goods of that kind, a buyer in the ordinary course of dealing can obtain whatever title the entruster had, even if the merchant converts the goods in connection with such a sale. 

This merchant entrustment rule estops an owner from seeking replevin from a buyer in the ordinary course of business, even where the merchant converted the goods by selling them.  The policy behind the rule places the greater financial risk and/or burden on the owner in its dealing with the merchant while protecting the buyer in the ordinary course in its dealing with the same merchant. In part, this policy is designed to encourage transactions and to make sales final.  In addition, of the two parties, the owner is said to be in a better position to perform necessary diligence in his dealings with the merchant than the buyer is.^[1] The statute presumes that the owner entrusting the goods will understand when he is dealing with a merchant who deals in goods of that kind so as to adjust his behavior to the potential increased risk.  However, this may not be as obvious as one might think on its face. 

A recent interpretation of UCC 2-403(2) which is currently on appeal raises a question as to how broadly courts will define what constitutes a “merchant who deals in goods of that kind,” and by extension how broadly the exception to the tradition rule will apply.  The case is called Zaretsky v. William Goldberg Diamond Corp, decided in the Southern District of New York, applying state law and interpreting UCC 2-403.^[2]  Zaretsky is currently on appeal in the Second Circuit Court of Appeals.^[3]

The court in Zaretsky set forth a rather broad definition of “merchant who deals in goods of that kind” by ruling that a fashion stylist who provided style advice to celebrities including lending them jewellery to wear in fashion shoots or to significant events such as movie premieres, was a merchant of such jewellery who dealt in goods of that kind.^[4] In Zaretsky, the fashion stylist was provided with jewellery for the purpose of lending it to his celebrity clients, and instead the fashion stylist stole the jewellery and sold it to pawn brokers.^[5] Though the fashion stylist was arrested and convicted in connection with the theft, the Southern District Court’s decision did not allow the owner to recover possession of the jewellery from the party who obtained it several transactions removed from the theft^[6], on the basis that the fashion stylist qualified under the law as a merchant who deals in goods of that kind, based upon his special knowledge of diamonds and jewellery as they relate to his field in fashion and who was therefore able to pass good title when he sold the goods.^[7] Of note, the decision in Zaretsky found the fashion stylist to be a merchant of goods of that kind, without any requirement that the proponent of such a ruling show that the fashion stylist had any history of selling such goods.^[8]

To date, no state court in New York has followed the holding in Zaretsy, nor has any prior case applied such an expansive definition of “merchant who deals in goods of that kind” in construing UCC 2-403(2).  Insurers will be watching the appeal to see if the decision is affirmed or not.  If affirmed, Zaretsky is a case that subrogated insurers will likely be seeing again and again in their recovery actions.   

Peter Rossi of Clyde & Co is a Senior Counsel in the New York office.  He focuses on insurance coverage and commercial litigation.

^[1] Porter v. Wertz, 53 N.Y.2d 696, 698 (1981).

^[2] Zaretsky v. William Goldberg Diamond Corp., 69 F. Supp. 3d 386, 392 (S.D.N.Y. 2014).

^[3] William Goldberg Diamond Corp. v. Zaretsky, Second Circuit Docket No. 15-35.

^[4] Zaretsky v. William Goldberg Diamond Corp., 69 F. Supp. 3d at 392.

^[5] Id. at 387.

^[6] William Goldberg Diamond Corp. v. Zaretsky, Second Circuit Docket No. 15-35, Doc. 38, Appellant’s Brief and Appendix, pp. 8, A-59-61. 

^[7] Zaretsky v. William Goldberg Diamond Corp., 69 F. Supp.3d at 392.

^[8] Id. at 391-392.