Mellen, Inc. v. Biltmore Loan & Jewelry-Scottsdale, LLC

• Decision Date: 24 March 2017
• Docket Number: No. CV–16–00648–PHX–DLR,CV–16–00648–PHX–DLR
• Citation: 247 F.Supp.3d 1084
• Parties: MELLEN, INC., a New York corporation, Plaintiff/Counterdefendant, v. BILTMORE LOAN AND JEWELRY–SCOTTSDALE, LLC, an Arizona limited liability company, Defendant/Counterclaimant. Biltmore Loan and Jewelry–Scottsdale, LLC, an Arizona limited liability company, Third–Party Plaintiff, v. SSB International, a Florida limited liability company; Scott Meyrowitz, an individual; and Joseph Gutekunst, an individual, Third–Party Defendants.
• Court: U.S. District Court — District of Arizona

247 F.Supp.3d 1084

MELLEN, INC., a New York corporation, Plaintiff/Counterdefendant,

v.BILTMORE LOAN AND JEWELRY–SCOTTSDALE, LLC, an Arizona limited liability company, Defendant/Counterclaimant.

Biltmore Loan and Jewelry–Scottsdale, LLC, an Arizona limited liability company, Third–Party Plaintiff,

v.SSB International, a Florida limited liability company; Scott Meyrowitz, an individual; and Joseph Gutekunst, an individual, Third–Party Defendants.

No. CV–16–00648–PHX–DLR

United States District Court, D. Arizona.

Signed March 24, 2017

Filed March 27, 2017

Craig Solomon Ganz, Michael Stephen Myers, Ballard Spahr LLP, Thomas McMurray Baker, Baker & Baker, Phoenix, AZ, Paul S. Hugel, Seth Langer Rosenberg, Clayman & Rosenberg LLP, New York, NY, John Alan Doran, Lori Wright Keffer, Sherman & Howard LLC, Scottsdale, AZ, Jack Pierce, Bernick Lifson PA, Minneapolis, MN, for Plaintiff/Counterdefendant/Third–Party Defendants.

Dennis Ira Wilenchik, Wilenchik & Bartness PC, Thomas McMurray Baker, Baker & Baker, Phoenix, AZ, for Defendant/Counterclaimant/Third–Party Plaintiff.

ORDER

Douglas L. Rayes, United States District Judge

This case was brought to determine ownership of a four-carat blue diamond worth nearly $2 million. Plaintiff Mellen, Inc. bought the diamond in 2013. Two years later, Defendant Biltmore Loan and Jewelry obtained the diamond through a pawn transaction and subsequent purchase.

On March 8, 2016, Mellen filed a complaint against Biltmore asserting claims for declaratory judgment, replevin, and conversion. (Doc. 1.) Biltmore has alleged slander and tortious interference counterclaims. (Doc. 61.) In June 2016, the Court issued a preliminary injunction enjoining the sale or transfer of the diamond pending resolution of this case. (Doc. 54.) The diamond presently is stored by Biltmore in a safe deposit box at a local bank. (Docs. 85, 91.)

Before the Court are cross motions for summary judgment. (Docs. 123, 126.) The motions are fully briefed. (Docs. 135, 139, 141, 149.) The Court heard oral argument on March 22, 2017. (Doc. 151.) For reasons that follow, Mellen's motion is granted in part and Biltmore's motion is denied.

SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate if the evidence, viewed in the light most favorable to the nonmoving party, shows "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The party seeking summary judgment "always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Substantive law determines which facts are material, and only disputes "over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A factual dispute is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.

BACKGROUND

For purposes of the summary judgment motions, the following facts are not genuinely disputed. Mellen is a wholesale diamond dealer specializing in colored and other high-quality diamonds. In June 2013, Mellen acquired the diamond at issue—a flawless, four-carat blue heart-shaped stone—by purchasing it from another diamond dealer in California.

On January 23, 2015, Mellen and a diamond dealer from Florida, Scott Meyrowitz, entered into a memorandum agreement concerning a potential future sale of the diamond. Pursuant to its terms, the diamond was given to Meyrowitz "on memo," which is a customary practice in the diamond trade. (See Doc. 54 at 2 n.1.) The memo provides, in pertinent part (Doc. 1 at 9):

The merchandise described below, is delivered to you on memorandum ... [and] only for examination and inspection by prospective purchasers, upon the express condition that all such merchandise shall remain the property of [Mellen], and shall be returned on demand, in full in its original form.... You acquire no right or authority to sell, pledge, hypothecate or otherwise dispose of the merchandise, or any part thereof, by memorandum or otherwise.... 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.... (This is NOT an INVOICE or BILL of Sale).

Meyrowitz received the diamond on January 26, 2015.

About two months earlier, Meyrowitz had reached out to the owner of Biltmore, David Goldstein, regarding a potential $1 million loan with the diamond as collateral. Meyrowitz thereafter introduced Goldstein to Joe Gutekunst, who purported to own the diamond and expressed interest in pawning it for $1 million. Goldstein and Gutekunst spoke about the pawn transaction the same day Meyrowitz entered into the memo with Mellen.

The transaction between Goldstein and Gutekunst was completed on March 2, 2015, the terms of which are set forth in a pawn ticket signed by Gutekunst. Biltmore wired the $1 million to Gutekunst the next day, and he immediately transferred $955,000 to Meyrowitz. Biltmore bought the diamond outright from Gutekunst on November 18, 2015, for a sale price of $1.3 million. This suit followed several months later to determine lawful ownership of the diamond.

DISCUSSION

It is undisputed that Mellen owned the diamond when it was given to Meyrowitz on memo. Mellen argues that neither Meyrowitz nor Gutekunst acquired any ownership rights in the diamond, and Biltmore cannot show that it obtained good title to the diamond as a good faith purchaser for value or through an entrustment or consignment under the Uniform Commercial Code (U.C.C.). Mellen further argues that Biltmore's counterclaims for slander and tortious interference fail as a matter of law because Mellen is the true owner of the diamond.

Biltmore initially asserted that the dispute is governed by Article 2 of the U.C.C., which covers transactions in goods by merchants. Biltmore argued that it had good title to the diamond under both the "good faith purchaser rule" provided in U.C.C. § 2–403(1) and the "entrustment rule" set forth in § 2–403(2). Biltmore now takes the position that Article 9 of the U.C.C., which covers secured transactions, governs the dispute. Biltmore argues that Mellen's delivery of the diamond to Meyrowitz constitutes a consignment under § 9–201 and Biltmore therefore has good title to the diamond as a purchaser for value of goods from a consignee under § 9–319. Despite taking the position that Article 9 controls, Biltmore does not waive any prior arguments made under Article 2. The Court therefore will address the arguments made under each article.¹

I. Biltmore Did Not Obtain Good Title to the Diamond Under U.C.C. § 2–403(1)

Relying on the good faith purchaser rule, Biltmore argues that it has good title to the diamond because Meyrowitz obtained voidable title through a "transaction of purchase" under U.C.C. § 2–403(1). That section provides, in pertinent part:

A person with voidable title has power to transfer good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though ... the delivery was procured through fraud[.]

U.C.C. § 2–403(1)(d). Mellen argues, correctly, that § 2–403(1) does not apply because neither Meyrowitz nor Gutekunst obtained the diamond under a transaction of purchase.

A transaction of purchase is limited to those situations in which a person delivers goods "intending for the subsequent seller to be the owner of the goods." Touch of Class Leasing v. Mercedes–Benz Credit , 248 N.J.Super. 426, 591 A.2d 661, 667 (1991). "Applying that definition to the case at bar, no ‘transaction of purchase’ occurred because it is clear from the record that [Mellen] never intended for [Meyrowitz] to become the owner of the [d]iamond." Zaretsky v. William Goldberg Diamond Corp. , 820 F.3d 513, 525 (2d Cir. 2016). Rather, Mellen gave it to Meyrowitz "on memo," and the express terms of the agreement preclude the finding that Meyrowitz was to have an ownership interest in the diamond.

The diamond was given to Meyrowitz "only for examination and inspection by prospective purchasers, upon the express condition that all such merchandise shall remain the property of [Mellen]." Meyrowitz "acquire[d] no right or authority to sell, pledge, hypothecate or otherwise dispose of the [diamond], or any part thereof, by memorandum or otherwise[.]" A sale of the diamond could occur "only if and when [Mellen] agree[d] and [Meyrowitz] shall have received from [Mellen] a separate invoice." The diamond was to be returned to Mellen "on demand, in full in its original form." The memo concludes by making clear that it "is NOT an INVOICE or BILL of Sale[.]" (Doc 1 at 9.)

In short, the memo could not be more explicit that the transaction between Mellen and Meyrowitz was not one of "purchase." Stated differently, in delivering the diamond to Meyrowitz on memo, Mellen never intended for him to become the owner of the diamond. Thus, even if Biltmore was a good faith purchaser for value, any title Meyrowitz might have had in the diamond was void, not voidable, and good title could not pass to Biltmore under § 2–403(1). See Zaretsky , 820 F.3d at 525.

The Fifth Circuit made this clear in American Standard Credit, Inc. v. National Cement Co. , 643 F.2d 248 (5th Cir. 1981). The court explained that a "transaction of purchase" occurs where the deliverer of the goods intended, however misguidedly, that the subsequent seller would become the owner of the goods. 643 F.2d at 268. Thus, "the con artist who fraudulently induces a manufacturer to deliver goods to him by means of a forged check has voidable title because he obtained delivery through a...