Mellen Incorporated v. Biltmore Loan and Jewelry - Scottsdale LLC, No. 2:2016cv00648 - Document 155 (D. Ariz. 2017)

Court Description: ORDER denying 123 Defendant Biltmore Loan and Jewelry-Scottsdale, LLC's Motion for Summary Judgment and granting in part and denying in part 126 Plaintiff Mellen, Inc.'s Motion for Summary Judgment. See PDF document for details. IT IS FURTHER ORDERED denying as moot 131 , 137 Biltmore's motions to exclude and strike expert opinions and reports and granting 152 Biltmore's motion to supplement briefing and denying 153 Mellen's motion to strike. Signed by Judge Douglas L Rayes on 3/24/17.(LSP)
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Mellen Incorporated v. Biltmore Loan and Jewelry - Scottsdale LLC 1 Doc. 155 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Mellen, Inc., a New York corporation, Plaintiff/Counterdefendant, 10 11 ORDER v. 12 No. CV-16-00648-PHX-DLR Biltmore Loan and Jewelry-Scottsdale, LLC, an Arizona limited liability company, 13 14 15 16 17 18 19 20 21 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. 22 23 This case was brought to determine ownership of a four-carat blue diamond worth 24 nearly $2 million. Plaintiff Mellen, Inc. bought the diamond in 2013. Two years later, 25 Defendant Biltmore Loan and Jewelry obtained the diamond through a pawn transaction 26 and subsequent purchase. 27 On March 8, 2016, Mellen filed a complaint against Biltmore asserting claims for 28 declaratory judgment, replevin, and conversion. (Doc. 1.) Biltmore has alleged slander Dockets.Justia.com 1 and tortious interference counterclaims. (Doc. 61.) In June 2016, the Court issued a 2 preliminary injunction enjoining the sale or transfer of the diamond pending resolution of 3 this case. (Doc. 54.) The diamond presently is stored by Biltmore in a safe deposit box 4 at a local bank. (Docs. 85, 91.) 5 Before the Court are cross motions for summary judgment. (Docs. 123, 126.) 6 The motions are fully briefed. 7 argument on March 22, 2017. (Doc. 151.) For reasons that follow, Mellen’s motion is 8 granted in part and Biltmore’s motion is denied. 9 (Docs. 135, 139, 141, 149.) The Court heard oral SUMMARY JUDGMENT STANDARD 10 Summary judgment is appropriate if the evidence, viewed in the light most 11 favorable to the nonmoving party, shows “that there is no genuine dispute as to any 12 material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 13 56(a). The party seeking summary judgment “always bears the initial responsibility of 14 informing the district court of the basis for its motion, and identifying those portions of 15 [the record] which it believes demonstrate the absence of a genuine issue of material 16 fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Substantive law determines 17 which facts are material, and only disputes “over facts that might affect the outcome of 18 the suit under the governing law will properly preclude the entry of summary judgment.” 19 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A factual dispute is genuine 20 “if the evidence is such that a reasonable jury could return a verdict for the nonmoving 21 party.” Id. 22 BACKGROUND 23 For purposes of the summary judgment motions, the following facts are not 24 genuinely disputed. Mellen is a wholesale diamond dealer specializing in colored and 25 other high-quality diamonds. In June 2013, Mellen acquired the diamond at issue – a 26 flawless, four-carat blue heart-shaped stone – by purchasing it from another diamond 27 dealer in California. 28 On January 23, 2015, Mellen and a diamond dealer from Florida, Scott -2- 1 Meyrowitz, entered into a memorandum agreement concerning a potential future sale of 2 the diamond. Pursuant to its terms, the diamond was given to Meyrowitz “on memo,” 3 which is a customary practice in the diamond trade. (See Doc. 54 at 2 n.1.) The memo 4 provides, in pertinent part (Doc. 1 at 9): 5 6 7 8 9 10 11 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. 12 About two months earlier, Meyrowitz had reached out to the owner of Biltmore, 13 David Goldstein, regarding a potential $1 million loan with the diamond as collateral. 14 Meyrowitz thereafter introduced Goldstein to Joe Gutekunst, who purported to own the 15 diamond and expressed interest in pawning it for $1 million. Goldstein and Gutekunst 16 spoke about the pawn transaction the same day Meyrowitz entered into the memo with 17 Mellen. 18 The transaction between Goldstein and Gutekunst was completed on March 2, 19 2015, the terms of which are set forth in a pawn ticket signed by Gutekunst. Biltmore 20 wired the $1 million to Gutekunst the next day, and he immediately transferred $955,000 21 to Meyrowitz. Biltmore bought the diamond outright from Gutekunst on November 18, 22 2015, for a sale price of $1.3 million. 23 determine lawful ownership of the diamond. 24 This suit followed several months later to DISCUSSION 25 It is undisputed that Mellen owned the diamond when it was given to Meyrowitz 26 on memo. Mellen argues that neither Meyrowitz nor Gutekunst acquired any ownership 27 rights in the diamond, and Biltmore cannot show that it obtained good title to the 28 diamond as a good faith purchaser for value or through an entrustment or consignment -3- 1 under the Uniform Commercial Code (U.C.C.). Mellen further argues that Biltmore’s 2 counterclaims for slander and tortious interference fail as a matter of law because Mellen 3 is the true owner of the diamond. 4 Biltmore initially asserted that the dispute is governed by Article 2 of the U.C.C., 5 which covers transactions in goods by merchants. Biltmore argued that it had good title 6 to the diamond under both the “good faith purchaser rule” provided in U.C.C. § 2-403(1) 7 and the “entrustment rule” set forth in § 2-403(2). Biltmore now takes the position that 8 Article 9 of the U.C.C., which covers secured transactions, governs the dispute. Biltmore 9 argues that Mellen’s delivery of the diamond to Meyrowitz constitutes a consignment 10 under § 9-201 and Biltmore therefore has good title to the diamond as a purchaser for 11 value of goods from a consignee under § 9-319. Despite taking the position that Article 9 12 controls, Biltmore does not waive any prior arguments made under Article 2. The Court 13 therefore will address the arguments made under each article.1 14 I. Biltmore Did Not Obtain Good Title to the Diamond Under U.C.C. § 2-403(1) 15 Relying on the good faith purchaser rule, Biltmore argues that it has good title to 16 the diamond because Meyrowitz obtained voidable title through a “transaction of 17 purchase” under U.C.C. § 2-403(1). That section provides, in pertinent part: 20 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[.] 21 U.C.C. § 2-403(1)(d). Mellen argues, correctly, that § 2-403(1) does not apply because 22 neither Meyrowitz nor Gutekunst obtained the diamond under a transaction of purchase. 18 19 23 A transaction of purchase is limited to those situations in which a person delivers 24 goods “intending for the subsequent seller to be the owner of the goods.” Touch of Class 25 Leasing v. Mercedes-Benz Credit, 591 A.2d 661, 667 (N.J. Super. Ct. App. Div. 1991). 26 “Applying that definition to the case at bar, no ‘transaction of purchase’ occurred because 27 1 28 Arizona, where Biltmore is located, has adopted the relevant provisions of the U.C.C. at issue in this case, as has New York where Mellen resides. See A.R.S. §§ 47-2403, 47-9102(A)(20), 47-9319; N.Y. UCC §§ 2-403, 9-102(20), 9-319. -4- 1 it is clear from the record that [Mellen] never intended for [Meyrowitz] to become the 2 owner of the [d]iamond.” Zaretsky v. William Goldberg Diamond Corp., 820 F.3d 513, 3 525 (2d Cir. 2016). Rather, Mellen gave it to Meyrowitz “on memo,” and the express 4 terms of the agreement preclude the finding that Meyrowitz was to have an ownership 5 interest in the diamond. 6 The diamond was given to Meyrowitz “only for examination and inspection by 7 prospective purchasers, upon the express condition that all such merchandise shall remain 8 the property of [Mellen].” Meyrowitz “acquire[d] no right or authority to sell, pledge, 9 hypothecate or otherwise dispose of the [diamond], or any part thereof, by memorandum 10 or otherwise[.]” A sale of the diamond could occur “only if and when [Mellen] agree[d] 11 and [Meyrowitz] shall have received from [Mellen] a separate invoice.” The diamond 12 was to be returned to Mellen “on demand, in full in its original form.” The memo 13 concludes by making clear that it “is NOT an INVOICE or BILL of Sale[.]” (Doc 1 at 9.) 14 In short, the memo could not be more explicit that the transaction between Mellen 15 and Meyrowitz was not one of “purchase.” Stated differently, in delivering the diamond 16 to Meyrowitz on memo, Mellen never intended for him to become the owner of the 17 diamond. 18 Meyrowitz might have had in the diamond was void, not voidable, and good title could 19 not pass to Biltmore under § 2-403(1). See Zaretsky, 820 F.3d at 525. Thus, even if Biltmore was a good faith purchaser for value, any title 20 The Fifth Circuit made this clear in American Standard Credit, Inc. v. National 21 Cement Co., 643 F.2d 248 (5th Cir. 1981). The court explained that a “transaction of 22 purchase” occurs where the deliverer of the goods intended, however misguidedly, that 23 the subsequent seller would become the owner of the goods. 643 F.2d at 268. Thus, “the 24 con artist who fraudulently induces a manufacturer to deliver goods to him by means of a 25 forged check has voidable title because he obtained delivery through a transaction of 26 purchase[.]” Id. Under § 2-403(1), “the defects in the con artist’s voidable title would be 27 cured by a sale to a good faith purchaser for value, and the good faith purchaser would 28 obtain clear title[.]” -5- 1 Where the con artist, however, “merely converts the goods to his own use after 2 having obtained possession of them in some manner other than through a transaction of 3 purchase, he does not even have voidable title; instead, he has void title, and cannot pass 4 good title even to a good faith purchaser for value.” Id. (emphasis added). This is 5 because a “purchaser of goods acquires [only the] title which his transferor had or had 6 power to transfer[.]” U.C.C. § 2-403(1). 7 Here, there is no genuine dispute that Meyrowitz obtained possession of the 8 diamond via “some manner other than through a transaction of purchase.” Am. Standard, 9 643 F.2d at 268. The record shows that in giving the diamond to Meyrowitz on memo, 10 Mellen never intended for Meyrowitz (or Gutekunst) to become the owner of the 11 diamond, and Mellen reserved unilateral authority to determine whether a future sale of 12 the diamond would occur. This is clear on the face of the memo, and courts interpreting 13 similar language have found that it precludes a “transaction of purchase” in the wholesale 14 diamond market. See Zaretsky, 820 F.3d at 525 (finding that because the memo stated 15 that the possessor of the diamond “acquire[d] no right or authority to sell, pledge, 16 hypothecate or otherwise dispose” of the diamond, no transaction of purchase occurred 17 and he “could not pass good title to subsequent bona fide purchasers for value under 18 section 2-403(1)”); Kimberly & European Diamonds, Inc. v. Burbank, 684 F.2d 363, 366 19 (6th Cir. 1982) (memo stating that the possessor of the diamond “acquire[d] no right or 20 authority to sell, pledge, hypothecate or otherwise dispose” of the diamond shows that 21 she “had no title, nor did she have authority to pass title to [the subsequent buyer]”). 22 Because Meyrowitz did not obtain the diamond through a “transaction of 23 purchase,” he had only void title to the stone and could not pass good title to Biltmore 24 even it was a good faith purchaser for value. Thus, Biltmore’s “attempt to shoehorn [its] 25 case within the confines of section 2-403(1) fails.” Zaretsky, 820 F.3d at 526. 26 II. Biltmore Did Not Obtain Good Title to the Diamond Under U.C.C. § 2-403(2) 27 Section 2-403(2) of the U.C.C. is known as the “entrustment rule.” The section 28 provides that “[a]ny entrusting of possession of goods to a merchant who deals in goods -6- 1 of that kind gives him power to transfer all rights of the entruster to a buyer in the 2 ordinary course of business.” U.C.C. § 2-403(2). The entrustment rule “is designed to 3 enhance the reliability of commercial sales by merchants (who deal with the kind of 4 goods sold on a regular basis) while shifting the risk of loss through fraudulent transfer to 5 the owner of the goods, who can select the merchant to whom he entrusts his property.” 6 Porter v. Wertz, 421 N.E.2d 500, 500-01 (N.Y. Ct. App. 1981). In order for the buyer to 7 have good title under § 2-403(2), three conditions must be met: (1) the goods must be 8 entrusted to a merchant, (2) the merchant must deal in goods of that kind, and (3) the 9 buyer must purchase the goods from the merchant in the ordinary course of business. 10 U.C.C. § 2-403(2). 11 For example, if the owner of a new car takes it back to the dealership for service 12 and the dealer puts it on the car lot and sells it to an unsuspecting buyer, the entrustment 13 rule would give good title to the buyer. The original owner, of course, would have 14 various claims for damages against the dealership, but the owner would bear the risk of 15 loss by entrusting possession of the car to the dealership. The innocent buyer, by 16 contrast, would not suffer the loss given his reasonable expectation that the dealership 17 had clear title to the car and the right to sell it because the dealership regularly “deals in 18 goods of that kind[.]” U.C.C. § 2-403(2). 19 The result would be different, however, if the buyer bought the car from the 20 salesman at a vacant parking lot not knowing he was employed by the dealership. It is 21 “well settled that § 2-403(2) protects ‘only persons who buy in the ordinary course out 22 of inventory’” from a merchant who deals in goods of that kind. Evergreen Mar. Corp. 23 v. Six Consignments of Frozen Scallops, 4 F.3d 90, 97 n.8 (1st Cir. 1993) (quoting 24 § 2-403(2) cmt. 3). 25 A. The Diamond Was Not Entrusted to Gutekunst and He Is Not a Merchant 26 Mellen argues that Biltmore’s claim to good title under the entrustment rule fails 27 because Mellen never entrusted the diamond to Gutekunst, he is not a diamond merchant, 28 and Biltmore did not buy the diamond in the ordinary course of business. Biltmore does -7- 1 not dispute that Mellen never entrusted the diamond to Gutekunst, or that he is not a 2 diamond merchant (Biltmore was told that Gutekunst was in the vitamin supplement 3 business but he in fact sells allergy drops). (Docs. 129, 142 ¶¶ 11-13.) Rather, Biltmore 4 contends that these facts are irrelevant because Meyrowitz was the one who sold the 5 diamond to Biltmore through a purported agency relationship with Gutekunst. Biltmore 6 asserts that Meyrowitz’s alleged transfer of the diamond to Biltmore through his agent 7 Gutekunst is protected by the entrustment rule. The Court disagrees. 8 The plain language of the rule provides that entrusting goods “to a merchant who 9 deals in goods of that kind gives him the power to transfer” the goods to a buyer. U.C.C. 10 § 403(2) (emphasis added). The entrustment rule “is meant to safeguard unsuspecting 11 buyers who purchase goods from merchants in good faith.” Great Am. Ins. Co. v. 12 Nextday Network Hardware Corp., 73 F. Supp. 3d 636, 640 (D. Md. 2014) (emphasis 13 added). The sale of goods from the merchant himself is an essential underpinning of the 14 entrustment rule. This is because the rule’s purpose is to “facilitate the free flow of 15 goods based on a buyer’s reasonable expectation that a merchant in possession of goods it 16 ordinarily sells has title to them.” Lakes Gas Co. v. Clark Oil Trading Co., 875 F. Supp. 17 2d 1289, 1305 (D. Kan. 2012). This purpose would be defeated if, as Biltmore contends, 18 the entrustment rule were to protect the purchase of a rare $2 million diamond from an 19 apparent vitamin salesman. 20 The narrow definition of a “merchant that deals in goods of that kind” supports 21 this conclusion. Unlike the general definition of “merchant” in § 2-104, which includes 22 the merchant’s own skill or knowledge that might not be apparent to a buyer, the concern 23 of § 2-403(2) is with a narrower class of merchants based on appearances. 24 individual buying a product from an apparent dealer in such goods expects to get 25 good title.” 26 shiny new car from a General Motors dealer, [but] one buying goods from a mere 27 warehouseman trying to recover storage costs knows that the seller is dealing with 28 somebody else’s goods.” Id. The entrustment rule would not apply even if, unbeknownst “An Id. (citation omitted). Thus, one “expects to get good title when buying a -8- 1 to the buyer, the car in fact belonged to the dealership and was sold by the warehouseman 2 at its request. 3 In short, § 2-403(2) “enables a merchant to transfer rights to an entrusted good 4 only if the person is a ‘merchant’ who ‘deals in goods of that kind,’ in this case diamonds 5 or other high-end jewelry.” Zaretsky, 820 F.3d at 520. Biltmore’s purchase of the 6 diamond from Gutekunst is not protected by § 2-403(2). Biltmore should have known 7 that a four-carat fancy blue diamond worth nearly $2 million did not belong to a 8 purported vitamin salesman. Stated differently, Biltmore had no reasonable expectation 9 that it was buying the stone from a diamond merchant. It therefore finds no safe harbor 10 in the entrustment rule. 11 Biltmore contends that reliance on the part of the buyer has no place in the 12 entrustment rule, but the rule is specifically “designed to enhance the reliability of 13 commercial sales by merchants who deal with the kind of goods sold on a regular 14 basis[.]” Porter, 421 N.E.2d at 500-01 (emphasis added). For this very reason, the 15 rule protects “only those who purchase from the merchant to whom the property 16 was entrusted[.]” Kozar v. Christie’s, Inc., 971 N.Y.S.2d 555, 555 (N.Y. App. Div. 17 2013) (quoting Porter). 18 Biltmore asserted at oral argument that it would have been easy for Biltmore to 19 believe it was buying the diamond from Meyrowitz because he was involved in the 20 transaction, had dealings with the Gemological Institute of America (GIA), and the pawn 21 ticket states that Gutekunst was either the owner of the diamond or authorized to act on 22 the owner’s behalf. (Doc. 127-1 at 235.) But the undisputed evidence shows that 23 Biltmore did not actually believe it was buying the diamond from Meyrowitz, to whom 24 the stone was entrusted, nor did Biltmore buy the diamond from someone it knew to be an 25 agent of Meyrowitz. Goldstein testified that he believed Meyrowitz was brokering the 26 sale of the diamond for Gutekunst, not the other way around. 27 Meyrowitz told Goldstein that Gutekunst wanted to sell the diamond to get money to 28 expand his vitamin business. (Id.) Goldstein made clear that the initial pawn transaction -9- (Doc. 24-2 ¶ 6.) 1 was with Gutekunst, not Meyrowitz (id. ¶ 9), and Goldstein wired the $1 million loan 2 directly to Gutekunst’s bank account (Doc. 127-1 at 236-37). Goldstein further testified 3 that he later purchased the diamond outright from Gutekunst for $1.3 million (Doc. 24-2 4 ¶ 10), and again the money was sent directly his way (Doc. 127-1 at 255). 5 This testimony is consistent with express terms of the pawn ticket. The customer 6 listed on the ticket is “Joe Gutekunst.” In pledging the diamond as security for the loan, 7 Gutekunst indicated that he “was the owner of the pledged goods free and clear of all 8 security interest liens.” 9 Meyrowitz. (Doc. 127-1 at 235.) The pawn ticket, combined with Goldstein’s own 10 testimony, undisputedly shows that Biltmore believed it was buying the diamond from a 11 vitamin salesman, not from a diamond merchant. Courts have long held “the ultimate 12 purchaser can demonstrate reliance and invoke [the protection of § 2-403(2)] only if he 13 believed he was buying from a dealer. The proof here is wholly lacking in [this] respect.” 14 Atlas Auto Rental Corp. v. Weisberg, 281 N.Y.S.2d 400, 404 (N.Y. Civ. Ct. 1967). The pawn ticket was signed by Gutekunst himself, not 15 Biltmore contends that it does not matter that it was misled into believing 16 Gutekunst owned the diamond because in reality Gutekunst was Meyrowitz’s agent and 17 Biltmore therefore purchased the diamond from Meyrowitz. Although it may be true that 18 the entrustment rule protects a buyer who reasonably knows he is dealing with the lawful 19 agent or employee of a merchant of goods (such as a salesman at a car dealership), the 20 evidence in this case – even when construed in Biltmore’s favor – does not support a 21 finding that Biltmore knew it was purchasing the diamond from Meyrowitz through his 22 agent. 23 Rather, the undisputed evidence shows that Biltmore did not know about the 24 purported agency relationship, nor did it otherwise believe that it was buying the diamond 25 from Meyrowitz. As explained above, the entrustment rule is meant to protect a buyer 26 where there is a “reasonable expectation” that he is buying from a merchant who actually 27 trades in the goods bought. Lakes Gas Co., 875 F. Supp. 2d at 1305. This is what 28 promotes the “reliability of commercial sales by [such] merchants.” Porter, 421 N.E.2d - 10 - 1 at 500. The fact that Biltmore did not believe, reasonably or otherwise, that Gutekunst 2 was acting as Meyrowitz’s agent, precludes a finding that Biltmore bought the diamond 3 from a “merchant who deals in goods of that kind” under § 2-403(2).2 4 Biltmore’s reliance on Canterra and Standard Leasing is misplaced. (Doc. 141 5 at 7-9.) In each of those cases, goods were transferred to sham corporations which 6 reasonably appeared to be merchants in the types of goods sold in the ordinary course of 7 business. See Canterra Petro., Inc. v. W. Drilling & Mining Supply, 418 N.W.2d 267 8 (N.D. 1987) (oil pipeline sold by owner through sham oil pipeline company); Standard 9 Leasing Corp. v. Mo. Rock Co., 693 S.W.2d 232 (Mo. Ct. App. 1985) (work trucks sold 10 through sham leasing corporation formed by owner of construction equipment leasing 11 company). Neither case addressed the law of agency or applied the entrustment rule 12 where the seller did not appear to be a merchant of the goods sold. 13 Moreover, the court in Canterra distinguished a case similar to the one at hand, 14 Olin Corp. v. Cargo Carriers, Inc., 673 S.W.2d 211 (Tex. Ct. App. 1984). In Olin, a 15 superintendent of Cargo Carriers’ fertilizer warehouse, Jerry Dollar, entered into a 16 scheme to provide fertilizer to his co-conspirator, Charles Flowers, who pretended to be 17 the owner of the product and sold it to an unsuspecting buyer, Pat Ragsdale. Canterra 18 distinguished Olin as follows: 19 20 21 22 23 These circumstances are materially different from the instant case. Flowers, Ragsdale’s seller, was not an employee of Cargo Carriers but an outside party. Of even more significance is the court’s finding that Flower’s was not a merchant. Under those circumstances, the entrustment doctrine of Section 2-403, U.C.C., was inapplicable. Canterra, 418 N.W.2d at 272-73. Here, like the seller in Olin, Gutekunst was neither a 24 25 26 27 28 2 Citing allegations made in a related lawsuit against Gutekunst, Biltmore asserts that Mellen has judicially admitted that Gutekunst was acting as Meyrowitz’s “agent.” (Doc. 141 at 4.) But Mellen alleged only that Meyrowitz “orchestrated” the scheme and Gutekunst sold the diamond “on behalf of Meyrowitz.” (Doc. 142 ¶ 8.) Moreover, even if this somehow served as an admission of an agency relationship, there is no evidence that Biltmore had knowledge of the relationship when it purchased the diamond. - 11 - 1 diamond merchant nor an employee of Mellen or Meyrowitz.3 2 B. Biltmore Did Not Buy the Diamond in the Ordinary Course of Business 3 The entrustment rule set forth in § 2-403(2) is limited to sales to a “buyer in the 4 ordinary course of business.” A sale is not in the ordinary course of business unless it is 5 from a person “in the business of selling goods of that kind.” 6 (emphasis added). 7 diamonds. U.C.C. § 1-201(9) As explained above, Gutekunst is not in the business of selling 8 But even if Biltmore had purchased the diamond believing Gutekunst was 9 Meyrowitz’s agent, the entrustment rule still would not apply. A buyer in the ordinary 10 course of business “does not include a person that acquires goods . . . as security for or in 11 total or partial satisfaction of a money debt.” Id. Biltmore contends that it did not 12 acquire the diamond in this manner (Doc. 141 at 13), but the record shows otherwise. 13 Biltmore acquired the diamond as security for the $1 million loan it extended to 14 Gutekunst as part of the pawn transaction on March 2, 2015. The pawn ticket’s security 15 interest provision makes this abundantly clear (Doc. 127-1 at 235): 16 17 18 19 SECURITY INTEREST: To secure my payment of this Loan and Security Agreement, I [Joe Gutekunst] hereby grant Lender [Biltmore] a security interest in the pledged goods described herein . . . . I promise to pay to the Lender, on or before the Maturity Date, the Amount Financed, plus all accrued interest and fees set forth in this Loan and Security Agreement. 20 When Biltmore later purchased the diamond outright for $1.3 million, it paid an 21 additional $250,000 and forgave the $1 million loan ($50,000 was withheld as interest on 22 the loan). (Doc. 24-2 ¶ 11.) Because a buyer in the ordinary course of business does not 23 include someone who acquires goods “as security for or partial satisfaction of a money 24 3 25 26 27 28 Mellen cited Olin for the first time at oral argument. Biltmore responded by filing a supplemental brief (Doc. 152), which Mellen has moved to strike (Doc. 153). But the Court was aware of Olin before oral argument. As explained above, the case was discussed at length in Canterra. Thus, Mellen’s discussion of Olin at oral argument was nothing new to the Court. Nonetheless, the Court has considered Biltmore’s supplemental brief addressing the case and finds that it does not change the Court’s analysis. Mellen’s motion to strike is denied. - 12 - 1 debt,” Biltmore does qualify for protection under § 2-403(2). 2 Biltmore claims that it actually purchased the diamond when Gutekunst pawned it 3 on March 2, 2015, because the U.C.C. deems a “pledge” to be a purchase and pawn 4 transactions are considered purchases under Arizona law. (Doc. 141 at 13 (citing U.C.C. 5 § 1-201(b)(29)-(30); A.R.S. § 44-1621(9).) But the pawn ticket undisputedly includes a 6 provision creating a security interest in the diamond. (Doc. 127-1 at 235.) Although 7 Gutekunst had no obligation to fully redeem the pledged diamond, he promised to make 8 payments on the loan or risk forfeiting the diamond to Biltmore after the loan’s 90-day 9 maturity date unless the redemption period was extended, as occurred here. (Id.) 10 Gutekunst made multiple $40,000 interest payments to “keep the loan/pawn open.” 11 (Doc. 127-1 at 246.) 12 pawnbroker – has himself testified that the pawn transaction was not converted to a 13 purchase until he forgave the $1 million loan on November 18, 2015. (Doc. 24-2 ¶ 11.) 14 Similarly, Biltmore affirmatively alleges in its third-party complaint that Gutekunst 15 conspired to “initially pawn the diamond” and then later to “convert the pawn to an 16 outright sales transaction.” (Doc. 61 at 18, ¶ 70.) Moreover, Goldstein – an experienced diamond trader and 17 Despite Biltmore’s contention that it purchased the diamond on March 2, 2015, the 18 undisputed evidence shows that the diamond was pledged as security for the $1 million 19 loan and Biltmore later forgave the loan when it bought the diamond outright. These 20 facts preclude a finding that Biltmore bought the diamond in the ordinary course of 21 business under § 2-403(2). 22 In summary, none of the conditions of the entrustment rule can be met given that 23 the diamond was not entrusted to Gutekunst, he is not a diamond merchant, and the 24 diamond was not bought in the ordinary course of business. U.C.C. § 2-403(2). 25 III. Biltmore Did Not Obtain Good Title to the Diamond Under U.C.C. § 9-319 26 Biltmore argues that Mellen’s transfer of the diamond to Meyrowitz on memo 27 constitutes a consignment under U.C.C. § 9-102(a)(20), and Meyrowitz therefore 28 transferred good title to Biltmore as a consignee under U.C.C. § 9-319(a). That section - 13 - 1 provides, with certain exceptions, that a purchaser of goods “from a consignee . . . is 2 deemed to have rights and title to the goods identical to those the consignor had or had 3 power to transfer.” The purpose of §§ 9-102(a)(20) and 9-319(a) is “to protect general 4 creditors of the consignee from claims of consignors that have undisclosed consignment 5 arrangements with the consignee that create secret liens on the inventory.” Overton v. Art 6 Fin. Partners LLC, 166 F. Supp. 3d 388, 402 (S.D.N.Y. 2016). 7 A. The Transaction Between Mellen and Meyrowitz Was Not a Consignment 8 The parties agree that the terms “on memo” and “consignment” often are used 9 interchangeably in the diamond trade, and Mellen itself has referred generally to the 10 transaction with Meyrowitz as a “consignment.” But this use of “the term alone is not 11 ‘magical.’” In re Citation Corp., 349 B.R. 290, 296 (Bankr. N.D. Ala. 2006). Mellen 12 notes, correctly, that its use of the term is no substitute for the provisions of the memo 13 governing the transaction or the legal definition of “consignment” in § 9-102(a)(20), 14 which requires that the goods be delivered to the merchant “for the purpose of sale[.]” 15 Biltmore contends that even though Meyrowitz had no authority to sell the 16 diamond, it nonetheless was given to him “for the purpose of sale” because the end goal 17 of the transaction was “the ultimate sale of the diamond.” (Doc. 139 at 7.) But it is well 18 settled that there is no consignment under § 9-102(a)(20) where, as in this case, a 19 merchant “is merely entrusted with temporary possession of the [owner’s] goods and has 20 no authority to sell them.” Glenshaw Glass Co. v. Ontario Grape Grower’s Mktg. Bd., 21 67 F.3d 470, 476 (3d Cir. 1995) (applying the predecessor to § 9-102(a)(20), former 22 § 2-326(3)); see Evergreen, 4 F.3d at 97 n.8 (“[W]e join those courts which have held 23 that temporary entrustments of possession by a bailee, without more, are not ‘sales on 24 consignment,’ within the meaning of U.C.C. § 2-326.”) (citations omitted). Similarly, 25 where the intention of the owner “was for the identical thing to be returned in the same or 26 some altered form, it [is] not a consignment.” In re Greenline Equip., Inc., 390 B.R. 576, 27 579 (Bankr. N.D. Miss. 2008). 28 As explained above, and pursuant to the express terms of the memo (Doc. 1 at 9), - 14 - 1 Mellen delivered the diamond to Meyrowitz only for “examination and inspection” by 2 others, not purchase. The diamond at all times was to “remain the property of [Mellen]” 3 and had to be returned “in full in its original form.” The memo makes clear that 4 Meyrowitz acquired “no right or authority to sell . . . or otherwise dispose of the 5 diamond.” (Id. (emphasis added).) Given these provisions within the four corners of the 6 memo – which governs the transaction between Mellen and Meyrowitz – it cannot 7 reasonably be said that the diamond was given to Meyrowitz “for the purpose of sale.” 8 See Glenshaw, 67 F.3d at 476; In re Greenline, 390 B.R. at 579. 9 It is worth noting that the memo contains an integration clause, which provides 10 that the terms of the memo “represent the entire contract with respect the [diamond] and 11 which cannot be varied by oral statements . . . or any contrary custom of the trade.” 12 (Doc. 1 at 9.) Thus, even if the transaction has been called a “consignment” and the term 13 is used interchangeably with “on memo” in the diamond trade, this does not convert the 14 transaction to one for “the purpose of sale” under § 9-102(a)(20). 15 In summary, the transaction was not a consignment under § 9-102(a)(20), and 16 Biltmore therefore does not have good title to the diamond under § 9-319(a), given that 17 Meyrowitz had no authority to sell the diamond, title always remained with Mellen, and 18 Mellen maintained the right to recall the diamond at any time. See In re Citation, 349 19 B.R. at 296-97 (finding no consignment given similar terms in the agreement despite the 20 fact that it contained “some form of the term consign 68 times”); see also Zaretsky, 820 21 F.3d at 516 (referring to a memo as a “consignment agreement” but finding that the 22 subsequent seller had no authority to sell or transfer title to the diamond).4 23 B. Biltmore Did Not Buy the Diamond from a Consignee 24 The plain language of § 9-319(a) limits its application to purchasers of goods 25 26 27 28 4 Biltmore asserts that the Court has found that Mellen delivered the diamond to Meyrowitz for the purpose of an “anticipated sale.” (Doc. 123 at 6.) The Court did note in the preliminary injunction order that Mellen delivered the diamond to Meyrowitz “to display it to potential buyers” (Doc. 54 at 8 n.7), but this is consistent with the express terms of the memo and, as explained above, does not render the transaction a consignment under § 9-102(a)(20). - 15 - 1 from a “consignee,” which means “a merchant to [whom] goods are delivered in a 2 consignment.” U.C.C. § 9-102(a)(19). Here, even if the transaction between Mellen and 3 Meyrowitz constituted a consignment, Biltmore still would not have obtained good title 4 to the diamond under § 9-319(a) because it bought the diamond from Gutekunst – not 5 Meyrowitz, the “consignee.” Because the evidence, even when construed in Biltmore’s 6 favor, shows that diamond was not delivered to Meyrowitz on consignment under 7 § 9-102(a)(20) and Biltmore did not otherwise buy the diamond from a consignee, 8 Biltmore did not obtain good title under § 9-319(a).5 9 IV. Biltmore Did Not Obtain Good Title to the Diamond Under U.C.C. § 9-317 10 Relying on its assertion that the transaction between Mellen and Meyrowitz was a 11 consignment, Biltmore contends that it purchased the diamond free and clear of any 12 security interest Mellen might have had in the diamond under § 9-317, which governs the 13 priority of competing security interests in goods. As explained above, however, the 14 transaction was not a consignment. Moreover, Mellen is the rightful title owner of the 15 diamond, not one with a mere security interest in the stone. 16 V. Mellen’s Claims for Declaratory Judgment, Replevin, and Conversion 17 In count one of its complaint, Mellen seeks a declaratory judgment under 28 18 U.S.C. § 2201 declaring that it is the lawful owner of the diamond. (Doc. 1 at 6, ¶¶ 19 18-22.) 20 jurisdiction, a federal court, upon the filing of an appropriate pleading, “may declare the 21 rights and other legal relations of any interested party seeking such a declaration[.]” 22 In its replevin claim asserted in count two, Mellen seeks an order for the return of the 23 diamond. (Id. ¶¶ 23-27.) 24 damages should Biltmore fail to return the diamond. (Id. ¶¶ 28-32.) Section 2201(a) provides that in a case of actual controversy within its Mellen asserts a conversion claim in count three, seeking 25 In their summary judgment briefs, the parties address issues concerning lawful 26 ownership of the diamond and Biltmore’s affirmative defenses and claim to good title 27 28 5 Given this conclusion, the Court need not reach Mellen’s other arguments relating to §§ 9-102(a)(20) and 9-319(a). - 16 - 1 under the Uniform Commercial Code. Neither side, however, addressed the specific 2 claims asserted by Mellen in its complaint: declaratory judgment, replevin, and 3 conversion. The Court therefore directed the parties to address these claims at oral 4 argument. (Doc. 150.) 5 The parties agreed that if the ownership issue is resolved on summary judgment, 6 the Court may grant relief on the declaratory judgment claim asserted in count one of the 7 complaint (Doc. 1 ¶¶ 18-22) by declaring one of the parties to be the lawful owner of the 8 diamond. See 28 U.S.C. § 2201. Biltmore made clear at oral argument that resolution of 9 the declaratory judgment claim would be dispositive as to who will obtain possession of 10 the diamond going forward and there therefore is no need to address the replevin claim 11 once lawful ownership is decided. Mellen confirmed that it has elected the return of the 12 diamond as a remedy and does not seek a trial and an award of damages on the replevin 13 and conversion claims. See A.R.S. §§ 12-1307, -1310. Based on these agreements and 14 concessions, and for reasons stated above, the Court grants summary judgment on the 15 declaratory judgment claim in favor of Mellen, declares Mellen to be the lawful owner of 16 the diamond, orders that Mellen is legally entitled to possession and return of the 17 diamond from Biltmore, and otherwise denies summary judgment on the replevin and 18 conversion claims asserted by Mellen. 19 VI. Biltmore’s Counterclaims for Slander and Tortious Interference 20 “Slander of title requires proof of ‘the uttering and publication of the slanderous 21 words by the defendant, the falsity of the words, malice and special damages.’” SWC 22 Baseline & Crimson Investors, L.L.C. v. Augusta Ranch Ltd. P’ship, 265 P.3d 1070, 1086 23 (Ariz. Ct. App. 2011) (citation omitted). Similar to the malice requirement for slander, a 24 tortious interference claim requires “a showing that the defendant acted improperly.” 25 Barrow v. Ariz. Bd. of Regents, 761 P.2d 145, 152 (Ariz. Ct. App. 1988). Mellen argues 26 that Biltmore is without evidence to support its counterclaims. The Court agrees. 27 Biltmore’s claims for slander and tortious interference are premised on the notion 28 that Mellen “consigned and entrusted” the diamond to Meyrowitz, and Biltmore therefore - 17 - 1 is a “good faith purchaser for value of the diamond and [its] true owner[.]” (Doc. 61 ¶¶ 2 39, 56.) But none of this is true. The undisputed evidence shows that Mellen is the 3 rightful owner of the diamond. 4 Biltmore alleges that Mellen made a slanderous statement and tortiously interfered 5 with Biltmore’s ability to re-sell the diamond because Mellen contacted the GIA alleging 6 that the diamond had been stolen, thereby causing the GIA to “red flag” the diamond. 7 (Id. ¶¶ 54, 64.) Mellen, however, did no such thing. The evidence cited by Biltmore 8 itself shows that Mellen’s attorneys contacted law enforcement who then notified the 9 GIA that the diamond had been reported stolen. (Doc. 142 ¶ 32.) Moreover, given that 10 Meyrowitz had no lawful authority to sell the diamond and it at all times remained the 11 property of Mellen, Biltmore cannot create a triable issue as to whether the statement that 12 the diamond was stolen was either false or made with malice or for an improper purpose. 13 The Court grants summary judgment in favor of Mellen on Biltmore’s 14 counterclaims. 15 VII. The Motions to Exclude and Strike Expert Witness Opinions and Reports 16 Biltmore has moved to exclude the expert report of Richard Mellen (Doc. 131), 17 and has moved to strike the rebuttal report of Michael Tocicki (Doc. 137). Because the 18 Court has not relied on these reports in ruling on the motions for summary judgment, the 19 motion to exclude and motion to strike are denied as moot. 20 VIII. Conclusion. 21 There is no triable issue as to whether Mellen is the lawful owner of the diamond. 22 Biltmore has presented no evidence showing that Mellen made a slanderous statement or 23 tortiously interfered with Biltmore’s business expectancy. The Court will grant summary 24 judgment accordingly. 25 IT IS ORDERED: 26 1. 27 28 Defendant Biltmore Loan and Jewelry-Scottsdale, LLC’s motion for summary judgment (Doc. 123) is DENIED. 2. Plaintiff Mellen, Inc.’s motion for summary judgment (Doc. 126) is - 18 - 1 GRANTED IN PART and DENIED IN PART. The Court grants summary judgment 2 in favor of Mellen on the declaratory judgement claim asserted in count one of the 3 complaint, declares Mellen to be the lawful owner of the diamond, and orders that Mellen 4 is legally entitled to possession and return of the diamond from Biltmore. Mellen’s 5 motion for summary judgment is denied with respect to the claims for replevin and 6 conversion asserted in counts two and three of the complaint. 7 8 9 3. Biltmore’s motions to exclude and strike expert opinions and reports (Docs. 131, 137) are DENIED as moot. 4. Biltmore’s motion to supplement briefing (Doc. 152) is GRANTED and 10 Mellen’s motion to strike (Doc. 153) is DENIED. 11 Dated this 24th day of March, 2017. 12 13 14 15 16 Douglas L. Rayes United States District Judge 17 18 19 20 21 22 23 24 25 26 27 28 - 19 -