New York Law Review

Tag: Entrustment

  • New Amsterdam Jewelry, Inc. v. Hartford Fire Ins. Co., 63 N.Y.2d 1018 (1984): Establishing Entrustment for Insurance Exclusion

    New Amsterdam Jewelry, Inc. v. Hartford Fire Ins. Co., 63 N.Y.2d 1018 (1984)

    An insurer bears the burden of proving that a loss falls within a policy exclusion for dishonest acts by individuals to whom insured property was delivered or entrusted; mere employment by the consignee is insufficient to establish entrustment.

    Summary

    New Amsterdam Jewelry, Inc. sued Hartford Fire Insurance Co. to recover for the loss of diamonds under an all-risk policy. The policy excluded coverage for losses caused by dishonest acts of those to whom the property was delivered or entrusted. The diamonds were stolen by Sergio, an employee of International Diamond & Gem, the buyer. The New York Court of Appeals held that Hartford failed to prove the diamonds were entrusted to Sergio, merely showing his employment was insufficient. Therefore, the exclusion did not apply, and New Amsterdam could recover under the policy.

    Facts

    New Amsterdam Jewelry, Inc. (plaintiff) possessed an all-risk insurance policy issued by Hartford Fire Insurance Co. (defendant). The policy excluded losses from dishonest acts by employees or those to whom the insured property was delivered or entrusted. Sergio, a buyer for International Diamond & Gem, contacted New Amsterdam. After confirming Sergio’s employment, New Amsterdam shipped diamonds worth $102,428.50 to International. Postal receipts confirmed delivery to International. The diamonds were stolen by Sergio. New Amsterdam filed a claim, which Hartford rejected based on the policy’s exclusion.

    Procedural History

    New Amsterdam sued Hartford in the Supreme Court, New York County. The Supreme Court granted summary judgment for New Amsterdam. The Appellate Division reversed, holding the exclusion applied because the diamonds were no longer in the insured’s possession. The dissent argued that the stipulated facts did not demonstrate International entrusted the diamonds to Sergio. New Amsterdam appealed to the New York Court of Appeals.

    Issue(s)

    Whether the insurer, Hartford Fire Insurance Co., met its burden of proving that the loss of diamonds fell within the policy exclusion for dishonest acts “on the part of any person to whom the property hereby insured may be delivered or entrusted” when the diamonds were stolen by an employee of the consignee.

    Holding

    No, because the insurer failed to establish that the diamonds were delivered or entrusted to Sergio, the employee who stole them; his employment with the consignee, International Diamond & Gem, was insufficient to prove entrustment.

    Court’s Reasoning

    The Court of Appeals emphasized that the insurer bears the burden of proving that a loss falls within a policy exclusion, citing International Paper Co. v Continental Cas. Co., 35 NY2d 322, 327. The court focused on the policy language, which excluded losses resulting from dishonest acts “on the part of any person to whom the property hereby insured may be delivered or entrusted.” The court found the stipulation that Sergio was an employee of International insufficient to establish delivery or entrustment to him. The court noted, “Nor should it be inferred from the fact that Sergio was an employee of International that the diamonds were delivered or entrusted to him by International, in the face of the stipulated fact that they were stolen by Sergio, whether before or after or without entrustment to him we are not told.” The court distinguished the case from Abrams v Great Amer. Ins. Co., 269 NY 90 and David R. Balogh, Inc. v Pennsylvania Millers Mut. Fire Ins. Co., 307 F2d 894, where entrustment was established. The court also cited Glick v Excess Ins. Co., 14 NY2d 635, noting that even giving an employee a key to the store and the combination to the safe did not establish entrustment as a matter of law. The court concluded that the insurer failed to meet its burden of proving entrustment, thus the exclusion did not apply, and the insured could recover under the policy. The state of mind of the insured is relevant to determining entrustment, but only once some evidence of delivery or entrustment exists, which was lacking here.

  • Porter v. Wertz, 53 N.Y.2d 696 (1981): Limits of the Entrustment Doctrine Under UCC § 2-403(2)

    Porter v. Wertz, 53 N.Y.2d 696 (1981)

    The “entrustment provision” of UCC § 2-403(2) protects only those who purchase from the merchant to whom the property was entrusted, in the ordinary course of the merchant’s business; it does not protect a buyer who purchases from someone other than the entrusting merchant, even if that person is connected to the merchant.

    Summary

    Porter entrusted a painting to Von Maker, an art merchant. Von Maker, using the alias Peter Wertz, sold the painting to Feigen Gallery through Wertz, a delicatessen employee. When Porter sought to recover the painting, Feigen Gallery argued that UCC § 2-403(2) protected their title because Porter entrusted the painting to an art merchant. The court held that the entrustment provision was inapplicable because Feigen did not purchase the painting from the entrusting merchant (Von Maker), but from Wertz, a non-merchant, and the sale wasn’t in the ordinary course of business. The court affirmed the lower court’s decision in favor of Porter.

    Facts

    Porter owned an Utrillo painting and entrusted it to Harold Von Maker, an art merchant. Von Maker used the name Peter Wertz in his dealings with Porter. Von Maker then gave the painting to the actual Peter Wertz, a delicatessen employee, and asked him to find a buyer. Wertz approached the Feigen Gallery, and Richard Feigen purchased the painting from Wertz, believing him to be an art dealer. Feigen had been told by Henry Sloan that a person named Peter Wertz, who was an art dealer, was interested in selling a Utrillo. Porter sued to recover the painting after discovering it at the Feigen Gallery.

    Procedural History

    The trial court ruled in favor of Porter. The Appellate Division affirmed, concluding that UCC § 2-403(2) did not protect Feigen Gallery’s claim to the painting. The New York Court of Appeals granted leave to appeal and affirmed the Appellate Division’s decision.

    Issue(s)

    1. Whether UCC § 2-403(2) protects a buyer who purchases goods from someone other than the merchant to whom the goods were entrusted, but who claims to be acting on behalf of that merchant, or is mistaken by the buyer to be the merchant?
    2. Whether the doctrine of equitable estoppel applies where the original owner entrusted the goods to a merchant who then used an alias, but did not directly interact with the ultimate purchaser through that alias?

    Holding

    1. No, because the protection of UCC § 2-403(2) extends only to purchases made directly from the merchant to whom the goods were entrusted in the ordinary course of that merchant’s business.
    2. No, because the original owner must have taken some action to clothe the eventual seller with apparent ownership or authority, and the purchaser must have relied on that appearance.

    Court’s Reasoning

    The court reasoned that the “entruster provision” of UCC § 2-403(2) aims to enhance the reliability of commercial sales by merchants. It shifts the risk of fraudulent transfer to the owner who selects the merchant. However, this protection is limited to purchases made directly from the entrusted merchant in the ordinary course of their business. The court emphasized that Feigen purchased the painting from Wertz, a delicatessen employee, not from Von Maker, the art merchant to whom the painting was entrusted. The court rejected the argument that Wertz was acting on Von Maker’s behalf because there was no evidence that Wertz disclosed this to Feigen, thus Feigen could not have relied on Von Maker’s status as an art merchant. The court highlighted the Appellate Division’s finding that Feigen failed to establish that Wertz was introduced as an art dealer. Regarding equitable estoppel, the court found that Porter did nothing to create apparent ownership in Wertz, as Porter delivered the painting to Von Maker, not Wertz. “An estoppel might arise if Porter had clothed Peter Wertz, with ownership of or authority to sell the Utrillo painting and the Feigen Gallery had relied upon Wertz’ apparent ownership or right to transfer it. But Porter never even delivered the painting to Peter Wertz, much less create apparent ownership in him”. Therefore, Feigen Gallery could not rely on an estoppel defense. The court explicitly declined to address the issue of Feigen’s good faith, given its other holdings.