Seller Delivers Jewelry – But Purchasers’ Check “Bounces”:

This was originally posted on the SGR Blog.

Were Subsequent Transferees Good Faith Purchasers for Value?

An owner of several pieces of valuable jewelry sells the gems to a purchaser whose check “bounces” for insufficient funds. But the purchaser “hocks’ the jewelry as collateral on a loan which goes into default. And the lender then sells the collateral to a third-party to cover the defaulted loan. As a recent case illustrates, adjudication of claims to the loot requires the Court to navigate around numerous legal propositions.

Regal Jewelry and Gift Shop, LLC sued BLCE, LLC, DBS Diamonds Inc., and Bijan & Co. Inc to recover misappropriated jewelry. BLCE, DBS, and Bijan moved to dismiss the complaint on the grounds of failure to state a cause of action, lack of standing, and defense based on documentary evidence.

The complaint alleged that, in November 2017, Regal agreed to sell a five-piece emerald and diamond set and an 18-karat gold diamond necklace to Lloyd Klein and Jocelyn Wildenstein, an engaged couple. The price for the set was $250,000 and for the necklace $18,000. Klein paid for the jewelry with four postdated checks which were dishonored. Approximately one week after receiving the jewelry from Regal, Klein, and Wildenstein pawned the gems to BLCE as collateral for a loan of $70,000 paid to Klein and/or Wildenstein. BLCE specializes in collateral loans on luxury jewelry.

Regal tried unsuccessfully to obtain payment for the jewelry or the return of the jewelry from Wildenstein and Klein. On March 20, 2018, an involuntary petition for bankruptcy under Chapter 7 was filed against Wildenstein. On May 17, the bankruptcy was converted into a voluntary case under Chapter 11. When Klein/Wildenstein failed to redeem the jewelry, BLCE offered it for sale to third parties. A June 28 receipt showed a sale from BCLE to DBS for $100,000. On June 29, Wildenstein’s bankruptcy attorney notified BLCE that the jewelry was the property of her bankruptcy estate and subject to the automatic stay. On July 20, DBS sold the jewelry to Bijan for $126,000. Bijan had the jewelry in its possession.

On August 13, Regal filed an adversary complaint in Wildenstein’s bankruptcy—and sought $268,000, the amount that Klein and Wildenstein agreed to pay Regal. The adversary complaint alleged that Wildenstein paid for the jewelry with four post-dated checks dated January through April, naming Regal as the payee. Each check was in the amount of $62,000. The adversary complaint further alleged that Regal deposited the earliest dated check in January. The check did not clear, and Regal was advised that there were no funds in Wildenstein’s account.

The bankruptcy trial was resolved in favor of Regal. The Court held that Wildenstein’s $268,000 debt to Regal, which Wildenstein admitted to owing, was exempt from discharge in her bankruptcy. And determined that Regal claimed that it was notified for the first time on June 29, 2018 that an unidentified party had possession of the jewelry. In response to that claim, Wildenstein’s counsel filed a letter in the bankruptcy proceeding revealing that BLCE was in possession of the jewels. And Regal then learned (upon contacting BLCE) that BLCE had already sold the Jewelry pursuant to the terms of the pawn transaction.

The Bankruptcy Court Judge determined that Wildenstein did not obtain the jewelry through larceny, embezzlement, or actual fraud, but pursuant to a “purchase transaction” involving “false pretenses” and “outright lies.” The decision noted that Wildenstein admitted that she knew, on the day the checks were issued, that her account did not then hold sufficient funds to cover the checks. Wildenstein deliberately and falsely led Regal to believe that she wanted the jewelry for her use. The evidence showed, and the Bankruptcy Court Judge found, that Wildenstein wanted to obtain the jewelry from Regal in November 2017 so that Wildenstein and Klein could use the jewelry as collateral for short-term, high-interest loans from a pawnbroker. Wildenstein did not disclose that fact to Regal. The entire proceeds of the pawnbroker’s loans were paid to Wildenstein.

The first cause of action in the complaint sounded in conversion. The second cause of action sought replevin of the gems from Bijan. And the third cause of action requested a judgment declaring and adjudging that Regal owned the jewelry.

BLCE, DBS, and Bijan argued that, since Regal transferred title to the jewelry according to a purchase transaction, BLCE ceased being the owner of the jewels when Klein/Wildenstein received them. And Regal consequently had no standing to maintain the action to recover the jewels or receive money for them. And argued that they were good faith or bona fide purchasers for value.

Standing to sue requires an interest in the claim that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request.

A party may move to dismiss on the ground that “a defense is founded upon documentary evidence.” A motion to dismiss may be granted where the documentary evidence utterly refutes the complaint’s factual allegations, conclusively establishing a defense as a matter of law. Judicial records, including judgments and orders, qualify as documentary evidence. The Court may take judicial notice of records in other actions. And pleadings in another lawsuit constitute informal judicial admissions, which are admissible as evidence but are not conclusive against the party. Only if the evidence is unrebutted and unexplained can statements in those records be grounds for dismissal.

Letters and emails may also constitute documentary evidence. The documentary evidence herein consisted of the records from the bankruptcy case emails and other records about BLCE’s sale to DBS; and Wildenstein’s bankruptcy attorney’s letter to BLCE. Regal did not object to or rebut any of them. Title to goods passes when the goods were delivered to the buyer unless otherwise agreed. A purchase transaction takes place when the seller delivers the goods intending for the buyer to become the owner of the goods.

When goods have been delivered under a purchase transaction, the purchaser obtains title even though the delivery was in exchange for a check that is later dishonored or postdated. The purchaser of property by a dishonored check obtains voidable title, meaning that the purchaser, despite not paying for the goods, can transfer good title to the goods to a good faith purchaser for value. Obtaining goods by dishonest means does not prevent a buyer from obtaining voidable title and the power to transfer good title to a good faith or bona fide purchaser for value.

Whatever rights a purchaser obtains can, in turn, be transferred to another purchaser. After the property has passed into the hands of a bona fide purchaser, every subsequent purchaser stands in the shoes of such bona tide purchaser and is entitled to the same protection as the bona fide purchaser irrespective of notice unless such purchaser was a former purchaser, with notice, of the same property before its sale to the bona fide purchaser.

The facts showed that Regal transferred the jewels pursuant to a purchase transaction. Although the checks given for the jewelry were dishonored, Wildenstein/Klein obtained voidable title and was able to pass good title to a good faith purchaser for value. That person, in turn, could pass good title to another purchaser.

Regal argued that Klein/Wildenstein stole the jewels. A thief’s title is void, and it cannot pass good title even to a bona fide purchaser for value. But the alleged facts and the bankruptcy court decision refuted the claim that the jewels were stolen. That is, they were not “stolen” in a fashion that would prevent Wildenstein/Klein from transferring good title to a good faith purchaser for value. Good faith purchasers are not liable for conversion to the original owner. The seller’s reclamation right is barred if the goods have been sold to a good-faith purchaser for value.

Regal further argued that BLCE was not a good faith purchaser because it noticed Regal’s prior claim. Regal did not allege that BLCE did not give value. For BLCE to qualify as a good faith purchaser for value, it must have acted with honesty in fact and in accord with reasonable commercial standards of fair dealing in the trade. A good faith purchaser must not have noticed that another party has or could have a superior claim to the goods.

As to notice, Regal alleged that BLCE undertook little to no investigation regarding whether Klein was in fact the owner or was otherwise authorized to pledge the jewelry. And it was alleged (upon information and belief) that on June 29, Wildenstein’s bankruptcy counsel notified BLCE that the jewelry might be the property of Wildenstein’s bankruptcy estate and that it was subject to ownership claims by Regal. On July 20, 2018, after receiving word of Regal’s claims to the jewelry, DBS sold the Jewelry to Bijan.

A person has notice of a fact when they have actual knowledge of it, has received a notice of it, or from all the facts and circumstances known to him at the time in question, he has reason to know that it exists. A person notifies or gives notice to another by taking such steps as may be reasonably required to inform the other person in ordinary course, whether or not the other person actually comes to know of it.

Regal failed to allege that BLCE, DBS, or Bijan had notice of another claim to the goods at the time that the jewelry was pawned or before BLCE sold the jewelry to DBS. Regal did not allege anything tending to show that any of them had notice of any circumstances that alerted them to the sellers’ defective title or to another party’s possible claim, which would trigger a duty of inquiry. And the June 29 letter by Wildenstein’s bankruptcy attorney to BLCE did not mention Regal or any other party having claim to the jewelry, aside from the debtor. The letter did not show that BLCE was given notice of Regal’s claim.

BLCE’s documentary evidence, consisting of emails and records of wire transfers, did not conclusively establish a defense as a matter of law. The documents did not show that BLCE sold the jewelry to DBS before BLCE received notice of Wildenstein’s bankruptcy case or Regal’s claim.

The motions by BLCE, DBS and Bijan to dismiss the complaint were granted.

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