In re Ide Jewelry Co., Inc.

• Decision Date: 24 July 1987
• Docket Number: Bankruptcy No. 86 B 10623.
• Citation: 75 BR 969
• Parties: In re IDE JEWELRY CO., INC., Debtor. UNDERWRITERS AT LLOYDS, as subrogees of Bharat Diamond Corp., Plaintiff, v. Zachary SHIMER, Trustee for Ide Jewelry Co., Inc., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

75 B.R. 969 (1987)

In re IDE JEWELRY CO., INC., Debtor UNDERWRITERS AT LLOYDS, as subrogees of Bharat Diamond Corp., Plaintiff, v. Zachary SHIMER, Trustee for Ide Jewelry Co., Inc., Defendant.

Bankruptcy No. 86 B 10623.

United States Bankruptcy Court, S.D. New York.

July 24, 1987.

COPYRIGHT MATERIAL OMITTED

Chadbourne & Parke, New York City, for trustee; David A. Vicinanzo, of counsel.

Brian Fishkin, New York City, for Underwriters at Lloyds, as Subrogees of Bharat Diamond Corp.

DECISION

HOWARD C. BUSCHMAN, III, Bankruptcy Judge.

On October 3, 1986, the interim trustee (the "Trustee" or "Defendant") filed a motion seeking an order requiring Rodney Lissenden, as representative underwriter for and on behalf of Underwriters at Lloyds subscribing to policy of insurance No. JB750600978 ("Ide's Insurer"), to turn over the proceeds from a loss of property occurring on December 26, 1985, which was covered by the jewelers block policy issued to Ide Jewelry Co., Inc. ("Ide" or the "Debtor"). An affidavit in partial opposition to the interim trustee's motion was filed on behalf of Underwriters at Lloyds subscribing to policy of insurance No. JB244145100 ("Plaintiff") on October 15, 1986. Plaintiff made a payment of $35,000 to Bharat Diamond Corp. ("Bharat"), pursuant to the insurance policy it issued to Bharat, for diamonds stolen from Ide while on consignment from Bharat. Thus, plaintiff partially opposed the turnover motion based on its assertion that $35,000 of the proceeds should be turned over directly to it on the ground that it is allegedly a direct beneficiary of Ide's insurance policy.

At the hearing held on October 21, 1986, this Court directed that the underwriters insuring Ide interplead the net policy proceeds of $140,296.00 by delivery of that amount to the interim trustee and that the affidavit in partial opposition to the interim trustee's turnover motion would be deemed an adversary proceeding complaint which is denied by the other creditors and the interim trustee. A stipulation of facts was filed on February 24, 1987 and a trial on these stipulated facts was held on April 27, 1987.

I.

Bharat is a New York corporation which operates as a wholesaler of polished diamonds. Between December 9, 1985 and December 23, 1985, Bharat consigned to Ide more than 171 carats of loose diamonds pursuant to the terms and conditions of three separate jewelers memoranda. The memoranda provide:

The merchandise described below is delivered to you on memorandum, at your risk from all hazards, regardless of the cause of the loss or damage, only for examination and inspection by prospective purchasers, upon the express condition that all such merchandise shall remain the property of BHARAT DIAMOND CORP. and shall be returned on demand, in full in its original form. Until the merchandise is returned and actually received by us, you are fully responsible therefor, and in the event of damage or loss, whether caused by you or by another, whether or not under your control, you will indemnify us immediately by payment of the stated value which represents the extent of the actual loss and is not intended to constitute a price for the sale of the merchandise. You acquire no right or authority to sell, pledge, hypothecate or otherwise dispose of the merchandise, or any part thereof, by memorandum or otherwise, it being expressly understood that regardless of other transactions or prior trade customs, no credit is extended with respect to this merchandise. A sale of all or any portion of the merchandise shall occur only if and when we agree and you shall have received from us a separate invoice. A subsequent sale of any specific part of the merchandise, shall not affect the terms hereof with respect to the balance hereof. Receipt of the merchandise constitutes your agreement to the foregoing terms which represent the entire contract with respect to the merchandise herein described and which cannot be varied by oral statements, dealings with respect to other merchandise of sic any contrary custom of the trade. (This is NOT an Invoice or Bill of Sale).

Underneath the above printed terms, each memorandum contains a handwritten indication of the number of carats and the dollar amount per carat, followed by the words: "Payable in 60 days," "Payable 60 Days By Note" or "Terms Net 60 Days By Note."

On December 26, 1985, Ide agreed to sell a quantity of loose diamonds, including diamonds received from Bharat, to one Bogosian for approximately $293,000. The subject diamonds were thought to have been deposited in a cachet stored in Ide's safe awaiting Bogosian's return with the funds required to complete the sale. However, Bogosian never returned and when the cachet was opened a week later, it was discovered that he had switched the diamonds with packets of rice. Subsequently, on April 10, 1986, an involuntary petition was filed against the Debtor under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. (the "Code").

Plaintiff, having issued insurance coverage to Bharat for its goods entrusted to others in the trade in the amount of $40,000 less a $5,000 deductible, paid Bharat the sum of $35,000 for the loss of its goods. Plaintiff, as a subrogee of Bharat, now seeks to recover, as an insured under Ide's insurance coverage, $35,000 from the proceeds of the jewelers block policy issued by Ide's Insurer ("Ide's Policy" or the "Policy") which have already been deposited with the interim trustee.

Property insured by the Policy includes precious and semi-precious stones, see Policy ¶ 3(a), "delivered or entrusted to the Assured by others who are dealers in such property or otherwise engaged in the jewelry trade, but only to the extent of the Assured's own actual interest therein because of money actually advanced thereon, or legal liability for loss or damage thereto." Policy ¶ 3(c). Paragraph 10 of the Policy further provides:

In the event of loss of or damage to property of others held by the Assured for which claim is made upon the Underwriters, the right to adjust such loss or damage with the owner or owners of the property is reserved to the Underwriters and the receipt of such owner or owners in satisfaction thereof shall be in full satisfaction of any claim of the Assured for which such payment has been made. If legal proceedings be taken to enforce a claim against the Assured as respects any such loss or damage, the Underwriters reserve the right, at their option, without expense to the Assured, to conduct and control the defence on behalf of and in the name of the Assured. No action of the Underwriters in such regard shall increase the liability of the Underwriters under this Policy, nor increase the limits of liability specified in the Policy.

Policy ¶ 10.

Plaintiff concedes that the transaction between Bharat and Ide may be deemed a sale or return transaction under the Uniform Commercial Code (the "U.C.C.") but asserts that it is nevertheless entitled to recover the sum it paid to Bharat because it is subrogated to Bharat's right to bring a direct action against Ide's Insurer (Tr. 4/27/87 at 4). Defendant argues: (i) the transaction between Bharat and Ide must be treated as a "sale or return" under § 2-326 of the U.C.C. and thus the diamonds held by Ide and the proceeds from their loss are subject to the claims of Ide's creditors, including its trustee in bankruptcy, (ii) the Policy gave no party, other than the Debtor, a right of direct action against Ide's Insurer, (iii) even were Ide's Insurer subject to direct actions brought by parties other than the Debtor, only owners of goods in the Debtor's possession would have such an action, and Bharat was not an owner of the goods after it transferred them to the Debtor, and (iv) if Bharat had a right of direct action against Ide's Insurer, it was subsequently waived upon the failure of Bharat and its subrogee to bring the action during either the approximate 3½ months between the loss and the filing of the petition in bankruptcy or during the approximate 9½ months between the loss and the filing of Plaintiff's affidavit in partial opposition to the interim trustee's motion. See Respondent's Brief in Opposition at 2-3; Respondent's Supplemental Brief in Opposition at 1-2, 6.

II.

We turn first to Defendant's argument under § 2-326 of the U.C.C. That section provides, in pertinent part:

(1) Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is

(a) a "sale on approval" if the goods are delivered primarily for use, and

(b) a "sale on return" if the goods are delivered primarily for resale.

. . . .

(3) where goods are delivered to a person for sale and such person maintains a place of business at which he deals in goods of the kind involved, under a name other than the name of the person making delivery, then with respect to claims of creditors of the person conducting the business the goods are deemed to be on sale or return. The provisions of this subsection are applicable even though an agreement purports to reserve title to the person making delivery until payment or resale or uses such words as "on consignment" or "on memorandum". However, this subsection is not applicable if the person making delivery

(a) complies with an applicable law providing for a consignor\'s interest or the like to be evidenced by a sign, or

(b) establishes that the person conducting the business is generally known by his creditors to be substantially engaged in selling the goods of others, or

(c) complies with the filing provisions of the Article on Secured Transactions (Article 9).

N.Y.U.C.C. § 2-326 (McKinney 1964) (emphasis added).

Traditionally, a distinction has been drawn between "contracts of sale or return" and sales on "consignment" or "memorandum." See Ginsberg v. Martin, 122 Misc. 468, 468-69, 203 N.Y.S. 110, 111 (1st Dep't 1924). A "sale or return" involves "a delivery to a proposed purchaser,...