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Monarch Gems v. Malca-Amit USA

September 27, 2007

MONARCH GEMS, J.B. & S. BROS., BHARGOVI, AND KIRAN EXPORTS, PLAINTIFFS,
v.
MALCA-AMIT USA, L.L.C. AND U.S. BANK NATIONAL ASSOCIATION, DEFENDANTS.



The opinion of the court was delivered by: Blanche M. Manning

MEMORANDUM AND ORDER

This diversity action flows from defendant U.S. Bank National Association's involvement with an international documentary transaction in connection with efforts by the plaintiffs (partnerships organized under the Indian Partnership Act) to sell over $600,000 worth of diamonds to Victor Aloush, an individual doing business in Chicago's diamond district. After Mr. Aloush received the diamonds, he failed to pay for them and the plaintiffs discovered he had been convicted of robbery and burglary and had engaged in an elaborate scheme to defraud them. The plaintiffs then sued U.S. Bank, contending that its actions vis-a-vis the documentary transaction mean that it is liable for Mr. Aloush's failure to pay for the diamonds. U.S. Bank's motion for summary judgment is before the court.*fn1 For the following reasons, this motion is granted in its entirety.

I. Background

The facts are largely uncontested, although the legal conclusions to be drawn from these facts are hotly disputed. The plaintiffs included a number of legal conclusions in their statement of facts. Because legal conclusions are not facts, the court has omitted them from its summary of the relevant facts.

A. The Parties and Other Relevant Individuals

The plaintiffs are Indian partnerships registered under the Indian Partnership Act and act as diamond merchants. U.S. Bank is a national banking association engaged in the business of banking and finance. Julie Malit is an employee of U.S. Bank, and worked out of U.S. Bank's 30 N. Michigan Avenue branch for several years. Ms. Malit has been employed by U.S. Bank for more than eleven years.

Nimish Parikh is a partner in Niraj Enterprises, a diamond seller located in India. Nimish Parikh also acts as a diamond broker who brokers transactions between diamond buyers and sellers for a fee. Nimish Parikh resides in Mumbai, India. Nimish Parikh testified as the plaintiffs' Rule 30(b)(6) corporate representative in this case.

Ygal Yaakov is a diamond cutter and the sole proprietor of Tel Aviv Diamond, which is located at 5 South Wabash Avenue, Suite 705, Chicago, Illinois. The 5 South Wabash Avenue building is also known as the Maller's Building. Tel Aviv Diamond is a fictitious name by which Mr. Yaakov does business, as opposed to a corporate entity.

Tel Aviv Diamond has been a customer of U.S. Bank since 1995. As the sole proprietor of Tel Aviv Diamond, Ygal Yaakov transacted Tel Aviv Diamond business at the U.S. Bank branch formerly located at 30 N. Michigan, Chicago, Illinois on numerous occasions. During at least some of those visits, Ygal Yaakov worked directly with Julie Malit. During the course of Julie Malit's dealings with Ygal Yaakov, they developed a relationship whereby she came to know Ygal Yaakov and his business, Tel Aviv Diamond, including the fact that it is located at 5 South Wabash Avenue, Suite 705, in Chicago, Illinois.

Shay Sadina is a former employee of Tel Aviv Diamond, and was employed by Tel Aviv Diamond from 2001 through 2005. Julie Malit knew Shay Sadina because he made a number of deposits for Tel Aviv Diamond at the U.S. Bank's 30 North Michigan Avenue branch.

Nishit (a/k/a Nick) Parikh is Nimish Parikh's brother and owns Star Brilliant, a diamond wholesale business also located in the Maller's Building. Star Brilliant is a fictitious name by which Mr. Parikh does business, as opposed to a corporate entity. Star Brilliant was a customer of U.S. Bank from 2002 to 2004. As Star Brilliant's owner, Nishit Parikh transacted business in the U.S. Bank branch formerly located at 30 N. Michigan, Chicago, Illinois. During those visits, Julie Malit assisted Nishit Parikh on a number of transactions.

B. Victor Aloush

Victor Aloush immigrated from Israel to the United States in 1995. Victor Aloush and Ygal Yaakov became friends shortly after Mr. Aloush's arrival in the United States. Around 2002 or 2003, Victor Aloush began "sitting" with Tel Aviv Diamond. When someone "sits" with a business owner in the diamond trade, he or she uses the owner's office, phone and fax machine to conduct their own business and, in return, pays the owner a commission based on the profits that he or she makes conducting their business.

Victor Aloush occupied one of two offices in Tel Aviv Diamond's suite, which was located at 5 South Wabash Street, Suite 705. While "sitting" in Tel Aviv Diamond's suite, Victor Aloush conducted a diamond wholesaling business. Victor Aloush's office within Tel Aviv Diamond's office suite did not have a nameplate or identify the name of his company. Mr. Yaakov testified that a stranger walking in off the street would not be able to readily determine that Victor Aloush did not work for Tel Aviv Diamond.

Nishit Parikh first met Victor Aloush in the late 1990s. During July of 2003, Victor Aloush became interested in purchasing diamonds that Nishit Parikh could procure from India. At this same time, Victor Aloush printed a business card which represented that he was the President of a corporation named Tel Aviv Diamonds and Jewelry, Inc. Tel Aviv Diamonds and Jewelry, Inc., however, does not exist. Victor Aloush's business card listed the same address, suite number, and phone and facsimile numbers as Tel Aviv Diamond.

Victor Aloush had previously created a corporation named Tal Aviv Loose Diamonds & Jewelry, Inc. He testified that he created the Tel Aviv Diamond, Inc. (as opposed to Tal Aviv Loose Diamonds & Jewelry, Inc.) business card to make it appear that he was affiliated with Ygal Yaakov and Tel Aviv Diamond so Indian diamond sellers would do business with him, explaining: "[T]he Indian don't know me. They know Ygal more, you understand? . . . So, I just try to do it the same, you know what I mean?" Mr. Aloush's actions led the plaintiffs to believe that Tel Aviv Diamonds and Jewelry, Inc. was a legal corporate entity.

In July or August of 2003, Nishit Parikh informed his brother that Victor Aloush was with Tel Aviv Diamond and was looking to buy diamonds. The intent was for Nimish Parikh to broker diamond transactions between Victor Aloush and Indian diamond merchants with whom Nimish Parikh worked. Nishit Parikh performed an informal background check regarding Tel Aviv Diamond by speaking to individuals in the Maller's Building prior to referring Victor Aloush to his brother. Nishit Parikh relied on the reputation of Tel Aviv Diamond when referring Victor Aloush to his brother.

As a broker, Nimish Parikh guarantees his sellers that he will pay the purchase price for any diamonds that is not paid by a buyer that Nimish Parikh presented by promising "if I have matched you with a criminal who doesn't pay, I will pay myself." In agreeing to broker sales for Victor Aloush, however, Nimish Parikh did not investigate Victor Aloush, but relied exclusively on his brother Nishit Parikh's referral. In doing so, Nimish Parikh agreed that he was "taking a fairly big personal risk." In fact, Nimish Parikh and his diamond merchant clients did not know that Victor Aloush had been accused of and had plead guilty to robbery and burglary in 2001. If Nimish Parikh had known this, he would not have done business with him. However, the Parikh brothers were, at this point, ignorant of the true state of affairs, so Nishit Parikh arranged a meeting in India between Nimish Parikh and Victor Aloush for the purpose of facilitating a deal for the sale/purchase of diamonds.

C. Victor Aloush's Diamond Purchases

In July or August of 2003, Victor Aloush and another individual (Nachum Gendelman) went to Mumbai, India to meet with Nimish Parikh to negotiate the purchase of diamonds. While on that trip, Victor Aloush purchased diamonds from plaintiff Monarch Gems using Nimish Parikh's services as a broker. In connection with that purchase, Monarch Gems did not use a collecting bank to process the collection documents. Instead, it shipped the diamonds directly to Mr. Aloush, who paid in full.

During Victor Aloush's visit to India, Victor Aloush gave Nimish Parikh his "Tel Aviv Diamonds and Jewelry, Inc." business card. Nimish Parikh did not conduct any due diligence regarding this purported corporation, and did not have anyone search the Illinois Secretary of State's records to determine whether this corporation actually existed. When he later conducted an investigation on advice of counsel, he was unable to confirm that Tel Aviv Diamonds and Jewelry, Inc. existed.

In November of 2003, Victor Aloush and Nachum Gendelman again traveled to India to negotiate the purchase of additional diamonds. During this trip, Victor Aloush, acting as the purported President of the non-existent Tel Aviv Diamonds and Jewelry, Inc., purchased diamonds from a number of companies, including $118,932.40 worth of diamonds from plaintiff Monarch Gems and $110,735.05 worth of diamonds from plaintiff Kiran Exports. Victor Aloush agreed to pay for the Monarch Gems diamonds as follows: $50,000 within 60 days of delivery, and $68,932.40 within 90 days of delivery. He also agreed to pay for the Kiran Exports diamonds within 90 days of delivery. As the broker, Nimish Parikh guaranteed payment for the diamonds.

The plaintiffs did not independently verify if Victor Aloush/Tel Aviv Diamonds and Jewelry, Inc. could pay for these diamonds. Instead, they relied upon Nimish Parikh's representation that Victor Aloush and his purported company were trustworthy. In deciding to extend credit to Mr. Aloush, they also relied on the fact that Mr. Aloush had paid for his previous $100,000 diamond purchase and the protections afforded by their use of the international documentary collections process. Their trust in Mr. Aloush, however, was misplaced as he failed to pay for his November 2003 diamond purchases.

With the wisdom of 20/20 hindsight, the plaintiffs today assert that if they had known that Tel Aviv Diamonds & Jewelry, Inc. was not a corporate entity organized or registered in any jurisdiction, nationally or internationally, they would not have done business with Mr. Aloush. They also assert that they chose to conduct its business with Tel Aviv Diamonds and Jewelry, Inc. using an American "collecting bank" to ensure that Tel Aviv Diamonds and Jewelry, Inc. was in fact a legal corporate entity with an existing business relationship with an American bank.

D. The International Documentary Collections Process

Norma Bruneau, Vice President and Operations Manager for U.S. Bank's international trade operations in Milwaukee, Wisconsin, testified as U.S. Bank's Rule 30(b)(6) witness regarding its services as consignee in international documentary transactions. According to Ms. Bruneau, "international documentary collections" is a process by which a merchant engaged in the international sale of goods can deliver the goods via a carrier, and at the same time have its bank (known as the "remitting bank") deliver a set of shipping documents to a "collecting bank." Once payment is made by the purchaser or, in the case of a deferred term collection, once a promissory note is signed by the purchaser committing to pay for the goods, ...


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