MANHATTAN (CN) — A couple who owned a diamond stolen by a disgraced celebrity stylist never had a legitimate title to the stone and can't sue to keep it, the Second Circuit ruled.
The 7.35 carat diamond had been a gift from mother to daughter. However, apparently unbeknownst to the owners, the stone was one of those stolen in 2003 by Derek Khan, one of the most sought-after stylists in music and fashion during the 1990s.
Khan who was arrested in 2003 for borrowing and then illegally selling $1.5 million in jewelry — sold the diamond to a third party.
After the diamond went missing in February 2003, the William Goldberg Diamond Corp., its original owner, called the police and later reported the theft to the Gemological Institute of America, which maintains a database of stolen jewelry.
In March 2003, court documents said, the stone ended up in the hands of New York diamond supplier Louis E. Newman Inc., which unknowingly obtained an incorrect certification from the GIA that the diamond was legit.
The stone eventually wound its way through various sellers to Frank Walsh, whose wife in 2012 gifted it to her daughter Suzanne and son-in-law Steven Zaretsky.
In 2012, the New Jersey couple tried to have the diamond insured, but the appraiser recognized it as stolen and took custody of it.
The Zaretskys sued in 2013 to obtain proper title of the stone.
The William Goldberg Diamond Corp. then came forward and explained that it had consigned the diamond to Khan along with millions of dollars' worth of other jewelry and argued that, as a stolen jewel, the Zaretskys could not have valid title to the diamond.
It went on to argue in court that the original consignment agreement with Khan contained language specifying that he had no right to sell, pledge, or give away the diamond. Therefore, the diamond seller argued, the Zaretskys could not legally own it.
In 2014, a federal judge sided with the Zaretskys, ruling that they were the stone's rightful owners, despite the diamond having been previously stolen.
U.S. District Judge Shira Scheindlin wrote that because of the merchant entrustment rule — essentially the reverse of caveat emptor, in which buyers are immune and sellers must bear the risk of stolen goods —the title was legally passed to the Zaretskys and WGDC "will be left to bear an unfortunate liability."
But the Second Circuit held the lower court erred, because Khan was a stylist and not a merchant under New York's commercial code. Therefore, the three-judge panel said, he could not legally sell the diamond and the Zaretskys could not legally hold title to it.
In a 32-page decision, U.S. Circuit Judge Robert Sack wrote that only a person who "deals in goods of that kind" can be considered a merchant — something Khan most definitely was not.
Further, he wrote, the terms of the consignment agreement denied Khan any authority to sell the diamond.
"At most, Khan acted as a go-between under this second type of agreement, not as a seller," Sack wrote.
As a result, the Second Circuit ruled in the jeweler's favor, noting that "it would be inappropriate" to have it bear the cost of Khan's theft.
"Absent evidence that Khan regularly sold diamonds or other high-end jewelry, WGDC had little reason to suspect that he would do so once the company entrusted the diamond to him," Sack wrote.
The court also rejected the Zaretskys' argument that WGDC bore liability because it had not done enough to recover the stolen diamond.
"The Zaretskys have not shown that WGDC unreasonably delayed its search for the diamond," Sack wrote, noting the jeweler hired and investigator, told the police, and reported the diamond to the GIA.
"We're obviously disappointed with the decision," said William Strasser, who represents the Zaretskys, during an interview with Courthouse News.
During that conversation he noted the murky legal definition of what constitutes "goods of that kind" in New York case law.
"We knew going into it that we were treading on new ground in New York because it has not been defined," he said.
Strasser said he will appeal for an en banc review before the Second Circuit, but said in event that the Second Circuit's decision strengthens the case against jeweler Stanley & Sons — which in 2003 sold the diamond to Donna Walsh.
Khan, who is credited with creating the "Bling!" style of street-couture fashion worn by many celebrities and musicians, made his name by borrowing high-end jewelry in exchange for it being worn by celebrities. After he was busted for stealing $1.5 million worth of jewelry, he spent two years in prison, after which he was deported to his native Trinidad.
In recent years Khan has reinvented himself in Dubai, appearing on satellite channels in the kingdom and working at turns as a jeweler and a personal shopper, according to press reports.
His current status is unknown, as his eponymous website is down and he has not posted on his Twitter account since September 2015.
In an article in Gulf Elite Magazine, Khan is quoted as bragging about his turn as a celebrity stylist. "I got Dolce and Gabbbana and Yves St. Laurent to put their items on Salt 'n Pepa, turning gangster singers into sexy beasts and fashion goddesses," he is quoted saying in the article.
The same article explains Khan's fall from grace: "Long story short, Derek spent a while in prison, and as he puts it, 'it was a life-changing experience.'"
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