Judge Cites Lack of Documents Fail 'Good Faith' Measure on Stolen Diamond

S.B. Diamond was presented with the diamond in Israel and claims it purchased the diamond in good faith and sent it to New York to be graded by the GIA on/before October 29, 2001. Under Israel law, the new owner of a stolen diamond could retain ownership if the buyer proves the purchase was made in good faith.

The presiding Honorable Ronald L. Ellis (United States District Court for the Southern District of New York,) accepted Israel law in the case and the burden of proof was therefore on S.B. Diamond.

Throughout year 2005 and early 2006 parties presented their evidence, and on August 4, 2006, Judge Ellis  reached his decision. Read transcripts of the testimony from Rapaport News.

Judge Ellis found that S.B.  did not establish  the purchase was normal business practice (and ruled S.B. didn't usually buy and sell large diamonds) and that the company lacked supporting documents to show the purchase was made in Israel and in good faith.

The court found that material facts were in dispute as to whether, as S.B. alleged, it had bought the diamond in Israel and then sent it to New York, or whether, as Zarian alleged, the sale or transfer of the diamond had taken place in New York.

A bench trial was held from June 12-13, 2006, and the parties submitted post-trial briefs shortly thereafter. The court found  that, even if S.B. bought the diamond in Israel, S.B. has not met its burden to show that the purchase fulfills the requirements of the Israeli Sales Law for the transfer of title of stolen goods. Judgment was granted to Zarian.

Case Issues

The federal court applies the choice of law rules of the state in which it sits, in this case, New York and  mandated that questions regarding the "validity of a transfer of personal property [be] governed by the law where the property is located at the time of the transfer." Where the theft occurred was not relevant; what is important is where the sale or transfer of the stolen property took place. Therefore, where the sale of the diamond occurred is material in this case,  because it will determine which law on purchases applies. As noted, while Zarian claims the transfer occurred in New York, S.B. claims it occurred in Israel.

Under New York Law, a purchaser of personal property cannot acquire good title from a seller who stole the property. The court already determined that the diamond was stolen from Zarian in Dubai, if the sale or transfer took place in New York, the diamond is rightfully Zarian's.

In Israel, the "basic rule…is that a person cannot transfer to another more rights than he himself possesses."  Section 34 of Israeli Sales Law sets forth a significant exception to this principle known as "market overt," or "market remedy."

Like that of Italy, Israeli law prefers the bona fide purchaser, but Israel is not as extreme in that respect. Section 34 "focuses on the purchaser, and the circumstances in which he purchased the goods. The rule entirely disregards the manner in which the property left the prior rights-owner's possession." 

The goal is to "encourag[e] the security of purchasers in the commercial and consumer areas." The law imposes six requirements. The first five are objective tests: 1) a sale or contract must be made; 2) the property at issue must be "movable property"; 3) the seller must deal with the sale of property of the kind of item sold; 4) the sale must be made in the ordinary course of the seller's business; and 5) the buyer must take possession of the goods. The sixth requirement is a subjective test: The buyer must have acted in good faith.

The result of this combination of objective and subjective factors is that "an honest mistake on the part of the buyer as to the existence of one or more of the first five conditions, even if the mistake is reasonable, will be of no benefit to him if one or more of them is not in fact met. On the other hand, [because] the sixth condition is entirely subjective…even if the mistake as to the seller's rights was not reasonable, this will not detract from the required good faith."

If S.B. successfully demonstrated that the sale of the diamond took place in Israel, then S.B. has the additional burden of demonstrating that the sale meets the requirements of section 34.

Only three of these conditions are in dispute: Whether the seller who sold the diamond to S.B. sells the kind of goods at issue, whether the sale was made in the ordinary course of that seller's business, and whether S.B. acted in good faith. If S.B. met its burden, then S.B. takes title to the diamond despite the court's earlier finding that the diamond was stolen from Zarian.

No admissible documentary evidence was presented to establish S.B.'s purchase of the diamond in Israel. Instead, S.B. relied entirely on oral testimony and testified at trial to have  bought the diamond at Israel's Diamond Exchange.

S.B. witnesses were consistent in their description of most of the circumstances of the sale.

The witnesses explained that the way in which the diamond was purchased involved the use of a petek, a note that is routinely destroyed after payment is made. This explanation for the lack of initial documentation was credible, although the complete lack of any other documentary evidence from either buyer or seller finances raises serious questions.

Zarian argued that, even if S.B.  bought the diamond in Israel, the evidence does not support that S.B.'s buyer in Israel is the normal procedure for the company.

However, while there was minimal documentary evidence outlining the corporate structure of S.B., the witnesses were consistent and credible in their description of the arrangement of the Siyance family diamond business.

The organization of the family business finances was also quite fuzzy the judge wrote.

Zarian argued that a transfer of possession took place in New York when the diamond was taken from the S.B. New York office. However, the testimony about the consignment with a broker  was consistent among the various witnesses. Consignment is inconsistent with a transfer of ownership,  and therefore does not establish a transfer in New York.

The complete lack of documentary evidence of the purchase is disturbing, the judge wrote. The court found that, even if S.B. did buy the diamond in Israel, S.B. has not met its burden to demonstrate that the purchase meets the conditions of the Israeli Sales Law to obtain title to stolen goods.

As a result, S.B. has not met the burden of proof required to obtain title to the diamond.

Uncertain statements such as "it could be," paired with "I don't remember" cannot, standing alone, meet S.B.'s burden, the judge wrote. In Shetah, an Israeli appellate opinion involving similar facts as those here, the court found in favor of the purchaser on this factor because the seller was the owner of a diamond polishing plant whose partners "worked as diamond traders" and whose "business also included large diamonds such as the disputed diamonds."

In Shetah, the court found that the sale of the diamond in question took place in the ordinary course of business. The seller, a long-time participant in the diamond industry, was not a member of the exchange and the transaction took place in the "square next to the hall of the exchange."  The court found that traders who were not members of the exchange "normally" made their transactions there.

The payment had been made by off-setting a debt, which the court found adequately "in the normal course of the [seller's] business."  While S.B. has argued that the circumstances in Shetah appear more questionable than the sale at issue here, the material difference is a matter of proof. No documents were provided to assist the New York court in understanding the usual practices.

Instead, the court was left to assess the witnesses' statements solely in light of their own characterizations of the ordinary course. This was simply not enough to carry S.B.'s burden.

Good Faith

The good faith test is a subjective one, and parties testified that they believed that everything was in order for the transaction. However, because absolutely no documentary evidence was presented to establish either the price and manner of payment or the circumstances of the sale, the court finds that as to these factors, they have not provided sufficient evidence to support their expressions of good faith.

The behavior of S.B., particularly with respect to the diamond's journey to the New York office, only raises further questions about S.B.'s good faith. First, S.B. presented no documents to verify the diamond's transport by courier, entry through United States Customs, or arrival in their New York office. In addition, none of the witnesses could remember any of those details. S.B. had no notes as to when the account on this diamond was concluded.

Even more critical, no one could credibly explain why no documents would exist. In fact, had S.B. used the importer it usually did, some records should have been available.  The court would have  readily accepted the lack of a record of a wire transfer if any witness had been able to remember the manner of payment, which was not the case.

S.B. also lacked any internal documentation on the diamond's arrival. In fact, S.B.'s sole documentation of the diamond began when it was taken on consignment to be delivered to the GIA for grading. No contemporaneous invoice was available here.

S.B. did  not established that its purchase of the diamond in Israel was from a seller who dealt with the kind of property at issue, was in the ordinary course of business, or was in good faith.

The court found that, even if S.B. bought the diamond in Israel, S.B. had not met its burden to show that the purchase fulfills the requirements of the Israeli Sales Law for the transfer of title of stolen goods. Judgment was therefore entered for Zarian.