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Mouawad National Co. v. Lazare Kaplan International Inc.

March 6, 2007

MOUAWAD NATIONAL COMPANY AND AL-DORAR TRADING ESTABLISHMENT, PLAINTIFFS,
v.
LAZARE KAPLAN INTERNATIONAL INC., DEFENDANT.



The opinion of the court was delivered by: Richard J. Holwell United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs Mouawad National Company ("Mouawad") and Al-Dorar Trading Establishment ("Al-Dorar") are corporations organized under the laws of Saudi Arabia, each with its principal place of business in Saudi Arabia. Plaintiffs have brought this diversity action against defendant Lazare Kaplan International Inc. ("LKI"), a Delaware corporation headquartered in New York. Defendant has moved to dismiss the Amended Complaint pursuant to Rules 12(b)(1) and 12(b)(3) of the Federal Rules of Civil Procedure, or, in the alternative, for summary judgment pursuant to Rule 56 on the ground that it is not a proper party to this lawsuit. Plaintiffs have moved, pursuant to Rule 15(a), for leave to file a second amended complaint. For the reasons set forth below, both motions [42] are granted.

BACKGROUND

The following facts are drawn from defendant's statement of material facts and plaintiffs' counterstatement and are undisputed unless otherwise noted. Where the parties disagree, the facts are construed in favor of plaintiffs. See Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc., 182 F.3d 157, 160 (2d Cir. 1999).

This diversity action arises from the sale in October 2000 of a processed pink diamond valued at $1.5 million from POCL, N.V. ("POCL"), a Belgian corporation, to Mouawad's purchasing agent, Al-Dorar, in Saudi Arabia. Plaintiffs are jewelers and jewel traders. As set forth in more detail below, plaintiffs were unable to sell the pink diamond and attempted to return it to POCL. When POCL refused to accept the return of the diamond or credit plaintiffs' account, plaintiffs chose to file suit against LKI in the United States, alleging that POCL acted as LKI's agent in the transaction. The Court permitted limited discovery into the relationship between POCL and LKI, after which defendant moved for summary judgment on the ground that POCL was not acting as its agent in the transaction and thus LKI cannot be held liable for POCL's actions.

The Bellataire Diamonds

Some background on processed diamonds and the LKI subsidiaries involved in their manufacture and sale is helpful in understanding the issues raised in this motion. A subsidiary of General Electric Company (hereinafter referred to simply as "GE") developed a patented process that uses a proprietary high pressure, high temperature ("HPHT") technique to process brown Type IIa diamonds into colorless-and much more valuable-diamonds. (Def. 56.1 Statement ¶ 3.) On March 1, 1999, Pegasus Overseas, Ltd. ("Pegasus"), a wholly owned subsidiary of LKI incorporated in the Bahamas, announced that it had entered into an exclusive agreement with GE to sell these diamonds, known as "Bellataire" diamonds.*fn1 (Moryto Decl. in Support of Def.'s Mot. to Dismiss ("Moryto Decl."), Ex. C.) Under the agreement, Pegasus and GE share in the revenues produced through the marketing of the diamonds. (Def. 56.1 Statement ¶ 3.)

Pegasus formed a wholly owned subsidiary, Pegasus Overseas LLC ("POLLC"), to facilitate the invoicing, shipping, and transfer of the Bellataire diamonds. (Id. ¶ 8.) LKI also formed two companies to market the Bellataire diamonds: POCL for overseas markets and Bellataire Diamonds, Inc. ("BDI"), a direct subsidiary of LKI, for domestic markets. (Id. ¶¶ 9-- 10.) POCL, a Belgian corporation, is a direct subsidiary of LK Belgium, which is itself an indirect subsidiary of LKI and is incorporated in Belgium.*fn2 (Id.) POCL's business operations are managed out of the Belgian office of LK Belgium. POLLC and BDI are Delaware corporations located in LKI's offices in New York. (Id. ¶¶ 12--14.) POCL, Pegasus, and POLLC share corporate officers and directors with LKI: The president of LKI, Leon Tempelsman, is a director and president of Pegasus and a director of POCL. (Id. ¶ 5, 12; R. Mouawad Aff. in Support of Pls.' Opp'n ("R. Mouawad Aff.") ¶ 7--8; Mot. 13.) The vice president and chief financial officer of LKI, William Moryto, serves as the secretary-treasurer of Pegasus and is also a director of POCL. (Def. 56.1 Statement ¶ 5, 12; Moryto Decl. ¶ 1.) In addition, the vice president for sales at LKI, Chuck Meyer, is the managing director of BDI. (Def. 56.1 Statement ¶ 14.) Marianne Georges, an employee in the Belgian office of LK Belgium, provides services to POCL. (Id. ¶ 14.)

The Dispute over the Return of the Pink Diamond

At the time of Pegasus's announcement, plaintiffs were already customers of LK Belgium. (Id. ¶ 3.) In June 1999, Robert Mouawad, president of Mouawad and Al-Dorar and a famous jeweler in his own right, expressed to Georges his interest in merchandising the Bellataire diamonds. (Id. ¶ 20.) The discussions between Georges and Robert Mouawad culminated on May 12, 2000, in a written agreement (the "May 2000 Agreement") in which POCL granted Al-Dorar the exclusive right to sell colorless Bellataire*fn3 diamonds in the Middle East and Asia and also gave Mouawad the right to sell finished jewelry containing Bellataire diamonds at its retail stores throughout Europe. (Moryto Decl., Ex. D; Compl. ¶ 7.) Over the next eighteen months, Al-Dorar purchased over $22.7 million of colorless Bellataire diamonds. (Compl. ¶ 8.) POCL invoiced each of these purchases, and Al-Dorar remitted payment directly to POCL. (Moryto Decl. ¶ 23 & Ex. E.).*fn4

During the period in which the parties were negotiating the May 2000 Agreement, Georges offered Robert Mouawad a large kite-shaped pink Bellataire diamond weighing over 14.9 carats and having a wholesale value of over $1.5 million. (Compl. ¶ 10.) LK Belgium had purchased the rough diamond in September 1998 and sold the diamond to POLLC in July 1999, at which time it underwent GE's proprietary HPHT process. (Kailas Aff. in Support of Pls.' Opp'n ("Kailas Aff.") Ex. 21, at 3.) Robert Mouawad claims that he was hesitant to purchase the pink diamond because he was "unsure about the marketability of colored processed diamonds."

(R. Mouawad Aff. ¶ 13.) According to plaintiffs, however, he and Georges reached an oral agreement that POCL would accept the return of the pink diamond should he be unable to sell it. (Id.; Compl. ¶ 10.) In May 2000, after the stone was processed by GE and inscribed with Mouawad's hallmark, it was shipped "on behalf of POCL N.V." to "Mouawad S.A." under cover of POLLC's memorandum dated May 10, 2000. (Kailas Aff. Ex. 21, at 3; Pascal Mouawad Aff. in Support of Pls.' Opp'n ("P. Mouawad Aff.") Exs. 1, 5.) On that same day, POCL invoiced the sale of the pink diamond for $1,528,832 to Al-Dorar. (Kailas Aff. Ex. 25; Def. 56.1 Statement ¶ 25.) Al-Dorar evidenced its acceptance of the stone by wiring payment into POCL's account. (Kailas Aff. Ex. 21, at 3.) Thereupon, POLLC invoiced POCL for the stone (Kailas Aff. Ex. 26), and POCL tendered payment to POLLC. (Kailas Aff. Ex. 21, at 3.) POCL earned a 2.5-percent commission on each sale of the colorless and pink Bellataire diamonds to Al-Dorar. (See Kailas Aff. Ex. 20, 24--31; see also Tempelsman Dep. 19 ll. 8--11, Kailas Aff. Ex. 18 (confirming that POCL earned a commission).)

Although one of Mouawad's preferred customers took the pink diamond on a trial basis, the customer later returned it. (Compl. ¶ 11.) Consequently, in late 2001, Robert Mouawad notified Georges of his intention to return the pink diamond to her for a credit to his account. (Id. ¶ 29.) Plaintiffs were already embroiled in a dispute with Georges over the return of several colorless diamonds purchased under the May 2000 Agreement. Since September 2000, plaintiffs had argued to Georges that they had the right, based on established practice in the diamond trade, to exchange ten percent of the colorless stones that they had already purchased. (Id. ¶ 26; Kailas Aff. Ex. 8.) As the dispute over the return of the pink and colorless diamonds dragged on into 2002, Georges asked Moryto and Tempelsman to communicate with plaintiffs. (Id. ¶ 30.) Eventually others within the Lazare Kaplan organization and GE got involved as well. (Id. ¶ 34.) ...


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