Daniel Zhao of Hosane Auctions controversy.

So I took this case to a lawyer that in my opinion is one of the best in Australia and America, and asked for his thoughts.

>>>
Fact summary:
1. German coin dealer contracts to sell a bunch of coins to a US buyer, among which is a rare gold "1998 Spring Festival" coin.
2. When the German coin dealer delivers the coins, the gold coin is lost and cannot be delivered.
3. The coin is found more than a year later by an employee of the German coin dealer who does not know it had been sold to the US buyer.
4. The employee sells the gold coin to Zhao, a Chinese coin dealer. Zhao then puts the coin up for auction.
5. German coin dealer realizes the mistake after seeing the auction and contacts Zhao.
6. Zhao is notified that the coin is actually owned by the US buyer and asks for it to be returned. The US buyer also requests the same thing.
7. Zhao refuses and auctions off the coin for a tidy profit.

As between the German and the American:
The German is in breach of contract for failing to deliver what was promised. The American does not need to pay for the coin. The American may be able to get additional damages if he or she can prove that they had a contract to on-sell the coin for a profit.

As between the German and Chinese:
Generally, you cannot give what you do not do not have (the 'nemo dat' rule). So the question is whether the German or American had title to the coin (ownership) before it got sold to Zhao. Title passes when the parties intend it to pass. If it is not expressly specified in the contract of sale, then it will pass according to law. (Whether German or US law applies is a separate analysis in itself, and we don't really have enough facts to be able to make that determination. You'd need to look at where the contract was formed, and which country's laws govern the contract - this is usually stipulated in the contract itself, but may be overridden by local laws depending on how it is drafted.) Generally, title/risk passes when delivery occurs(could be upon shipment (FOB origin) or upon receipt), or upon delivery of a document of title where delivery can be made without moving the goods. As an educated guess, I would say title to the coin never passed to the American as no delivery was ever made. The American only has a claim for breach of contract. This being the case, the German was able to validly sell the coin to Zhao and pass title. Zhao would (legally) be in the clear.

As between the American and Chinese:
Assuming the above is correct, the American is out of luck if he wants the coin. He or she only has a contractual claim against the German.

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Yennus,

Yes, this is very, very interesting. We will see how this plays out, and who is finally determined to have title to the coin. Thanks very much to your lawyer friend for his analysis, and thank you for providing it

Best wishes,
Peter Anthony
China Pricepedia
http://www.pandacollector.com

 

It should be noted for clarity that it is only this thread that contains the words "stolen" when referring to this incident. Majestic Rarities only talks about the ethics of the situation

"Honor, ethics, and respect within our numismatic community has been violated in the most disappointing act of greed and deception"

Nowhere is it claimed that the coins were stolen or that this was a legally wrong. It was more in point an ethical issue from what I have read. Yes, Majestic Rarities talks about ownership of the coin being in question, but presents his view only on how the situation evolved and talks more about the ethical or moral implications of what has occurred.

 

Many thanks to the resident anonymous Panda lawyer who has contributed the following:

>>>
The full term for BFP is "bona fide purchaser without notice for value". In relation to U.S law, not only has the concept been part of case law for a very long time (see first paragraph of http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?art.icle=1078&context=flr), but the concept has also been codified in statute. The US Code applies it directly to patents as a form of (intellectual) property: http://www.law.cornell.edu/uscode/text/35/261. In relation to chattels (goods), the principle is codified in the Uniform Commercial Code: http://www.law.cornell.edu/ucc/2/2-403.html.

Here's a somewhat amusing case that arose from someone who sold diamonds to a defrauder: http://scholar.google.com/scholar_case?case=17643274900180793514&hl=en&as_sdt=2&as_vis=1&oi=scholarr (this is the appeals judgment; I couldn't find the trial judgment, but see section II.A). A really brief summary is here if you don't want to read the case (but you should at least read the facts, it reads like a novel with a lot of unsavory African characters that will make your head spin): http://ucclitigation.blogspot.com/2009/07/double-crossed-diamond-dealers-dinged.html. Replace diamonds with "coin" and you'll see some parallels. The case also talks about choice of law issues between Spain and the US.

The BFP concept only comes into play if title passed to the American and therefore the German was selling something he did not own. However this does not mean that Zhao doesn't get any title he still gets possessory title by the mere fact that he possesses the coin. Possessory title is good against the world, except anyone with superior title which is only the German. But unfortunately, the law (and equity) intervenes to cut off title to the German because of the BFP event.

Relevant excerpt from the case:
A bona fide purchaser is one who pays value, in good faith, and without actual or constructive notice of another's rights in the property. (Oakdale Village Group v. Fong (1996) 43 Cal.App.4th 539, 547.) The trial court found that defendants met this test, and that defendants purchased the gems from "persons who had apparent title but at least voidable title." We find this conclusion is supported by substantial evidence.

California law distinguishes between the person who purchased from someone who obtained title to the property by fraud and the person who purchased from a thief who had no title to sell. An involuntary transfer results in void title, while a voluntary transfer, even if fraudulent, results in voidable title. (Cal. U. Com. Code, 2403, subd. (1);[4] Suburban Motors, Inc. v. State Farm Mut. Auto. Ins. Co. (1990) 218 Cal.App.3d 1354, 1360-1361.) "As a general rule, an innocent purchaser for value and without actual or constructive notice that [the] vendor has secured the goods by a fraudulent purchase is not liable for conversion." (5 Witkin, Summary of Cal. Law (10th ed. 2005) Torts, 716, p. 1040.) However, the rule is different when it comes to involuntary transfers: because "(s)tolen property remains stolen property," a thief "cannot convey valid title to an innocent purchaser of stolen property." (Naftzger v. American Numismatic Society (1996) 42 Cal.App.4th 421, 432.)

In the present case, according to plaintiffs' own theory, either one of two scenarios addressed in Commercial Code, section 2403, subdivision (1), applies to this case, and under either scenario good title passes under California law. Under one scenario, the "transferor was deceived as to the identity of the purchaser" ( 2403, subd. (1)(a))i.e., Chayto was deceived as to the true identity of Mrs. Mobutu. Under the other scenario, the "delivery was procured through fraud punishable as larcenous under the criminal law" ( 2403, subd. (1)(d))i.e., Chayto's delivery of the gems to Shamash was procured by fraud. Under either scenario, because Shamash had voidable title, he could transfer good title even if he procured the gems from Chayto through fraud punishable as larceny. If, as plaintiffs assert, Shamash and Achmed were both involved in the scam together, then Achmed acquired voidable title from Shamash, and he was able to transfer good title to the defendants. (The only way Achmed would have less than voidable title is if Achmed stole the stones from Shamash, and there is no evidence of that.)
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Thanks for your thoughts philmart, but the words "stolen" are an important part of this discussion. If the coin was not stolen, then it appears that the Chinese dealer was legitimately sold a coin from a German dealer.

Going by the facts:
The Chinese dealer purchased a coin that was sold to him by a German dealer who owned it.
The American dealer lost out because of the negligence of the German dealer.
The German dealer is at fault for this train wreck.

In the interests of honor, ethics, and respect, it should be noted that Majestic Rarities only discloses the Chinese dealer's name. Even though the German dealer is clearly the main party at fault. Doesn't sound very ethical to me.

To quote my Panda brother JC8888888888:

<No offense intended towards any of these parties, nor to anyone in this post. I hope I'll get the opportunity to meet everyone listed here... especially the German dealer! If he had the Spring Festival Coin, perhaps he has a sheet of 1985 Brass Pandas available too >

 

After reading all these replies, it is sad to say , has been forgotten.

Regardless of what the final outcome from the court of law, or whether there will be one, I believe the court of public opinion already has its mind made up.

 

Thankfully the court system allows all sides to speak before judging the person.

 

Agreed.

 

I am more concerned about entities in the Zhao organization manipulating auction prices to pump up MCC prices.

 

That concern should be expressed in a different thread. This current thread is mainly concerned with the 1998 gold 5 ounce "Spring Festival" coin controversy.

http://forums.silverstackers.com/topic-27829-hosane-auction-results-bs-page-3.html <-- this thread is for expressing concerns about the manipulation of auction prices to pump up MCC prices.

 

Having heard a couple of very educated legal opinions, the conversation continues on ethics:

I'm puzzled by why it's unethical to not reveal the German dealer's name? No one has accused him of doing anything immoral, or illegal; one coin was misplaced. That can happen (although hopefully not often!). This accident was compounded when an employee found the coin, and sold it to a customer. There was clearly a lack of communication within the German company. The events are unfortunate, and inept, but not underhanded in any way. To try and fix the situation the dealer reportedly then offered a $100,000 profit to Mr. Zhao. How many coin dealers would do that? I see no reason why Nick Brown should add embarrassment to injury and include that information in his blog.

OTOH, allegedly, Mr. Zhao's representative was asked if he knew the market value of a coin. He quoted a price considerably less than 50% of what it was likely to bring at auction. No that's not illegal, but I know other coin dealers, like Nick Brown, who you can count on to give a fair response to that question. I consider that a matter of ethics, and it's why I have confidence in some people, and not others.

Best wishes,
Peter Anthony
China Pricepedia
http://www.pandacollector.com

 

I agree, please do so. I attempted to change it earlier but have lost edit permissions.
I apologize to any who were offended by it's use.

 

If anyone is interested, the industry feedback that I've gotten has been along the lines of, "The German dealer should have bought the coin back, even if it cost him several hundred thousand Dollars. If you are willing to make money from high-priced coins, then you have to stand up and be counted when things don't go your way. " Had that been done, none of us would have ever heard of this incident. OTOH, no one has defended the decision to auction a coin when the title to it has been questioned.

Best wishes,
Peter Anthony
China Pricepedia
http://www.pandacollector.com

 

<I'm a fan of Nick Brown, I have no misgivings towards him>

PandaCollector: I'm puzzled by why it's unethical to not reveal the German dealer's name? No one has accused him of doing anything immoral, or illegal; one coin was misplaced. That can happen (although hopefully not often!).
Yennus: It's is unethical, because based on the facts presented, the Chinese dealer is not at fault (he purchased a coin)- yet he is labelled. The German dealer is clearly at fault (in breach of contract) - and he is hidden.

PandaCollector: This accident was compounded when an employee found the coin, and sold it to a customer. There was clearly a lack of communication within the German company. The events are unfortunate, and inept, but not underhanded in any way. To try and fix the situation the dealer reportedly then offered a $100,000 profit to Mr. Zhao. How many coin dealers would do that? I see no reason why Nick Brown should add embarrassment to injury and include that information in his blog.
Yennus: The German dealer is clearly in the wrong, yet Nick Brown has hidden this person's identity. The Chinese dealer committed no crime in purchasing a coin, yet Nick Brown produces his name with the intention of bringing his character into question.

PandaCollector: OTOH, allegedly, Mr. Zhao's representative was asked if he knew the market value of a coin. He quoted a price considerably less than 50% of what it was likely to bring at auction. No that's not illegal, but I know other coin dealers, like Nick Brown, who you can count on to give a fair response to that question. I consider that a matter of ethics, and it's why I have confidence in some people, and not others.
Yennus: We don't have the whole facts of the incident, and only one side of the argument, from Nick Brown who wasn't even a primary witness - hence the wise use of the word "allegedly". The only objective fact we have is that Zhao purchased a coin at a considerable discount. This is not immoral nor a crime nor unethical.
a) We don't know if this was part of a package deal. E.g. Large million dollar orders may get large discounts.
b) We don't know if their was an established relationship between both dealers. E.g. The German dealer and the Chinese dealer may have been friends.
c) We don't know if their were other circumstances. E.g. The German dealer really wanted to sell the coin, while the Chinese dealer didn't really want it.
d) We don't know, and we may never know. But until more facts come to light, Zhao is entitled to the presumption of innocence.

But what we do know is:
a) The German dealer offered the coin to the Chinese dealer.
b) The German dealer accepted the Chinese dealer's offer and sold the coin to him.
c) The German dealer is responsible for knowing the worth of his coin.

At none of these stages has the Chinese dealer done anything unethical.

But at each of these stages the German dealer has been at fault.
a) The German dealer offered the coin to the Chinese dealer. <-- The German dealer enticed the Chinese dealer to buy
b) The German dealer sold the coin to the Chinese dealer. <-- The German dealer breached his contract with the American dealer
c) The German dealer is responsible for knowing the worth of his coin. <-- The German dealer didn't do his homework.

On the other hand, broadcasting private conversations between the German dealer and Chinese dealer without consent is unethical. The German dealer may have consented to Nick Brown's post, but the Chinese dealer probably wasn't even asked - and the Chinese dealer hasn't breached contract nor been negligent nor inept.

Intentionally bringing a person's character into question, without being a primary witness nor hearing the other persons side can also be considered unethical.

 

Agreed, although it is an assumption (and not necessarily a valid one) that Nick Brown did not know the other side of the story. All I can add is that I've been told that there is more evidence involved than hearsay. Nonetheless, if Mr. Zhao would like to present his side of the story publicly I am willing to give him equal space in China Pricepedia to do so. In fact, I will be delighted if he accepts the offer.

Best wishes,
Peter Anthony
China Pricepedia
http://www.pandacollector.com

P.S. Yennus, how do you address this? "no one has defended the decision to auction a coin when the title to it has been questioned."

 

PandaCollector: ... the industry feedback that I've gotten has been along the lines of, "The German dealer should have bought the coin back, even if it cost him several hundred thousand Dollars. If you are willing to make money from high-priced coins, then you have to stand up and be counted when things don't go your way. "
Yennus: The German dealer breached contract with the American dealer, thus the German dealer is responsible for the clean up. E.g Make the American dealer happy, perhaps offer him $100,000 compensation for lost profit, 1-2years of waiting, etc.

PandaCollector: OTOH, no one has defended the decision to auction a coin when the title to it has been questioned.
Yennus: Based on the legal advice I've received, the title does indeed go to the Chinese dealer. Zhao is in the clear because he is a BFP. The person that won the coin at auction is also in the clear because he too is a BFP.

As our anonymous Panda lawyer has pointed out:
"As an educated guess, I would say title to the coin never passed to the American as no delivery was ever made. The American only has a claim for breach of contract. This being the case, the German was able to validly sell the coin to Zhao and pass title. Zhao would (legally) be in the clear."

Section 2-403(1) states, in part: "A person with voidable title has power to transfer a good title to a good faith purchaser for value." Since the defendant was a good faith purchaser for value, it [he] could keep the diamonds coin. <-- http://ucclitigation.blogspot.com/2009/07/double-crossed-diamond-dealers-dinged.html

 

I disagree with this. Not until the questions regarding ownership are decided should this coin ever been auctioned. The matter should have been settled, or a judicial decision rendered first. I can remember being a witness, and watching one attorney tell a judge, "Your Honor, the way we read the statute," and be cut off by the judge. "It's not how you read the statute, counselor, but what the Legislature intended." The judge then ruled against the attorney on the point of law (and the whole case, for that matter). That's an example of why, imo, it's a serious mistake to assume a court will uphold your position until it has actually occurred.

I was told that lawyers in China took this position regarding the sale as well.

Best wishes,
Peter Anthony
China Pricepedia
http://www.pandacollector.com

 

On what grounds is the title of the coin questioned?

The German dealer sold the coin to the Chinese dealer.
The German dealer is in breach of contract to the American dealer.
The American dealer only has a contractual claim against the German dealer.

"Generally, title/risk passes when delivery occurs (could be upon shipment (FOB origin) or upon receipt)... As an educated guess, I would say title to the coin never passed to the American as no delivery was ever made. The American only has a claim for breach of contract. This being the case, the German was able to validly sell the coin to Zhao and pass title. Zhao would (legally) be in the clear." (anonymous Panda lawyer)

 

To the casual observer (e.g. me), the fact that the coin was auctioned, while its title was in question, is suspect.

Just saying.