## Facts

- Mellen, Inc., a wholesale diamond dealer, acquired a rare four-carat blue heart-shaped diamond valued at nearly $2 million.
- Mellen delivered the diamond to diamond dealer Scott Meyrowitz under an “on memo” memorandum agreement for inspection by potential buyers.
- The memorandum stated Mellen retained ownership and Meyrowitz had no authority to sell or otherwise dispose of the diamond without Mellen’s authorization.
- Meyrowitz arranged for Joseph Gutekunst, a vitamin salesman, to pose as the diamond’s owner in transactions with Biltmore Loan & Jewelry-Scottsdale, LLC, a pawn/loan and jewelry business.
- Biltmore made a $1 million loan secured by the diamond; it wired funds to Gutekunst, who transferred most of the proceeds to Meyrowitz.
- Biltmore later purchased the diamond from Gutekunst for $1.3 million, partly by forgiving the outstanding loan balance.
- After learning of the transactions, Mellen demanded return of the diamond and sued for declaratory relief and tort remedies; Biltmore asserted it had acquired good title under the UCC and counterclaimed for slander and tortious interference.
- The diamond was restrained from transfer by preliminary injunction while the case proceeded on cross-motions for summary judgment.

## Issues

1. Whether the UCC entrustment rule (UCC § 2-403(2)) allowed transfer of Mellen’s rights because Mellen entrusted the diamond to a merchant dealing in goods of that kind and Biltmore was a buyer in ordinary course.
2. Whether any transferor held voidable title under UCC § 2-403(1) sufficient to pass good title to a good-faith purchaser for value.
3. Whether the “on memo” arrangement triggered Article 9 (including UCC § 9-319) so that Biltmore, as a creditor or purchaser from the possessor, could obtain superior rights to the diamond.
4. Whether Mellen’s statements and efforts to recover the diamond supported Biltmore’s counterclaims for slander and tortious interference.

## Decision

- The court granted Mellen’s motion for summary judgment on ownership and denied Biltmore’s cross-motion.
- The court held Biltmore did not obtain title under UCC § 2-403(2) because it did not purchase the diamond from a merchant who deals in goods of that kind in the ordinary course of that merchant’s business.
- The court held neither Gutekunst nor Meyrowitz had voidable title under UCC § 2-403(1) that could support passing good title to Biltmore.
- The court rejected Biltmore’s reliance on Article 9 consignment-like theories and concluded Biltmore did not gain superior rights to Mellen under UCC § 9-319.
- The court entered summary judgment against Biltmore on its slander and tortious interference counterclaims.
- Mellen was declared the lawful owner and entitled to possession and related relief consistent with replevin and conversion theories.

## Legal Principles

- UCC § 2-403(2) permits a buyer in ordinary course to take the entruster’s rights only when the buyer purchases from the entrustee who is a merchant dealing in goods of that kind and the transaction is in the ordinary course of that merchant’s business.
- Buying from a non-merchant intermediary, in a transaction structured as a collateralized loan and later purchase, does not satisfy “buyer in ordinary course” requirements for entrustment-based title transfer.
- UCC § 2-403(1) does not allow a transferee to pass good title unless the transferor had title (or voidable title with power to transfer) in the first place.
- An “on memo” delivery that reserves ownership and withholds authority to sell supports the original owner’s continuing title against later transferees lacking UCC protections.
- Tort claims premised on an owner’s assertions of ownership may fail where the owner’s statements are substantially true and made in the course of asserting property rights.

## Conclusion

The court held that an owner’s “on memo” delivery of a diamond to a dealer did not allow a pawn/loan business to obtain good title through a purchase from a non-merchant intermediary, rejected voidable-title and Article 9 theories for superior rights, and entered summary judgment for the owner while disposing of the pawnbroker’s related tort counterclaims.


Mellen, Inc. v. Biltmore Loan & Jewelry-Scottsdale, LLC, 247 F. Supp. 3d 1084 (D. Ariz. 2017)