Court Applies UCC and GOL Statutes of Fraud

One of the threshold issues in commercial disputes is often the characterization of the transaction and/or the relief sought. As a recent case involving various claims to the proceeds of the sale of a diamond based upon an alleged oral agreement illustrates, adjudication of the nature of the case may be dispositive when it comes to the defense of the statute of frauds.

Basal Trading and Sons Ltd. alleged an oral partnership agreement with M&G Diamonds, Inc. and Roman Malakov Diamonds, LLC. According to the complaint, the partnership interest was divided equally (50%-50%) between Basal and M&G/Malakov. The partnership owned a one-third interest in a non-party partnership, which owned three diamonds. Under the agreement, three of the parties contributed one half of one third, i.e., one sixth, of the purchase price of the diamonds, and were entitled to receive one half of one third, i.e., one sixth, of the proceeds arising from the sale of any and/or all of the diamonds.

Basal allegedly made its contributions toward the purchase price of the diamonds on May 6, 2009; May 15, 2009; November 2, 2009; and May 4, 2010. Basal contended that M&G/Malakov received their one sixth share of the profits from the sale of two of the three diamonds-and Basal received its one-sixth share of such payment. However, Basal asserted that the third diamond was sold in December 2019 and that the proceeds of that sale were paid to the non-party partnership-and M&G/Malakov received their one sixth share, but that Basal did not receive its one sixth share of such payment.

M&G/Malakov asserted that, as the essence of the contract was for the purchase and sale of goods, here diamonds, the statute of frauds of UCC § 2-201 barred any oral agreement. The Court disagreed because Basal was not seeking to acquire an interest in the diamonds but was asserting an alleged interest in claimed partnership assets.

In any event, UCC § 2-201 did not pertain, because Basal alleged that it made its contributions over a period that was only two days short of a one-year period and that the sale of the first two diamonds occurred more than one year from its initial contribution. Based on that assertion, the Court determined that the cause of action for breach of contract lacked merit, in any event, as both the complaint and the affirmation in opposition to the motion to dismiss demonstrated that the oral partnership agreement could not have been performed in one year, and was therefore a violation of the Statute of Frauds in General Obligations Law § 5-701(a)(1).

The doctrine of “part performance” exception to the GOL statute of frauds did not rescue Basal’s claim for breach of an oral agreement. Such exception was inapplicable because Basal’s actions could not be characterized as unequivocally referable to the agreement alleged. Basal sought monetary damages, as opposed to specific performance in the form of the conveyance of a one third interest in the non-party, unnamed partnership, of which the diamonds were an asset.

Alternatively, the breach of contract claim was insufficiently pled, as it failed to assert the essential terms of an agreement, including, but not limited to, the parties and whether the alleged agreement was, in fact, written or oral. With respect to the parties to the agreement, Basal submitted the affirmation of Zevolon Shemesh in which he named Garni Diamonds as the entity whom Shemesh represented and, on whose behalf, Shemesh negotiated and sold the three diamonds to “a partnership.” However, that affirmation did not provide the name of the partnership to whom he sold the three diamonds. Nor did the complaint name the partnership to whom Garni Diamonds allegedly sold the three diamonds. The affidavit of Basal’s principal likewise failed to specify the name of the partnership.

The Court also agreed that Basal’s second cause of action for unjust enrichment failed. Such a claim may not be used to evade New York’s statute of frauds.

The third cause of action, upon which Basal sought the imposition of a constructive trust upon the proceeds of the diamond sale, also lacked merit. Basal failed to allege any facts that tended to show that there was a fiduciary relationship between Basal and M&G/Malakov.

Late last month, the Appellate Division modified the decision of Supreme Court and denied the motions to dismiss the causes of action for breach of contract and unjust enrichment. The complaint, together with the affidavits, adequately asserted a claim for breach of contract, including the terms of the alleged agreement, consideration, performance by DeColibus, breach by Schimmell, and resulting damages. And adequately asserted a claim for unjust enrichment-funding for the purchase of three diamonds; concerning the  purchasing, finishing and appraisal of the diamonds;  and the provision of expertise (which M&G lacked) in determining if the diamonds constituted a good value.