CAVEAT: One’s eyes are likely to glaze over in reading this. However, because Rick loves the nuances in the law, I am posting this primarily for his purpose!
Rick, you are going to love the level of detail in this “can of worms” that you have opened. This is a UCC problem. Relying on my law school notes, you should be able to resolve the issue. As it relates to the parties in your fact pattern, at a cursory glance, I’d conclude that Judge Judy was correct. However, I’d have to really focus on this to be confident of my answer. Let us know if you agree with Jude Judy's decision!
OWNERSHIP CLAIMS - THE BASIC RULE
Suppose that a thief (T) steals goods from O [Dealer in your facts] and sells them to S [Defendant in your facts] who pays value in good faith and without knowledge of O's title.
S resells the goods to B [Plaintiff in your facts], a good faith purchaser. Later, O learns that B has "his" goods and attempts to replevy them.
Of course, the issue becomes whether O can replevy the goods from the third party, B.
On these facts, O will prevail under the first sentence in 2-403(l): a "purchaser of goods," even though a good faith purchaser, (GFP) acquires "all title which his transferor had or had power to transfer . . . "
Here, S, "his transferor," had neither title nor power to transfer title because he purchased from a thief. As between O and B, both innocents, the risk is placed upon B.
1) B's remedy is against S for breach of warranty of title, see 2-312(l)(a),
2) and S's recourse is against T, if T can be found.
This is the basic common law rule, which was thought to preserve the security of property and remains the case whenever a “void” title is involved.
Thus, Judge Judy was correct. The plaintiff’s remedy here was to sue the defendant for breach of warranty of title under UCC 2-312(l)(a).
THE CODE EXCEPTIONS
Section 2-403, however, gives B better title than S had power to convey in two situations where a “voidable title or an entrusting is involved:
(1) Where O delivers the goods to S in a "transaction of purchase," which is voidable for fraud or some other defect, and S sells the goods to B, a GFP, [this exception applies to your facts] and
(2) Where O entrusts the goods to S, a merchant who deals in goods of that kind, and S sells them to a "buyer in the ordinary course of business." (BIOCB) See 1-201(9).
Note that in both cases, O has intentionally done something; that is, delivered the goods to S, and created a risk that B will be mislead by S's possession.
But the purpose of the delivery is different:
1) in the first case, O intends to sell the goods to S
2) in the second he does not.
The purpose notwithstanding, in both, B has an excellent chance to obtain good title.
Note again, however, that the UCC does not make an exception where O has not voluntarily surrendered his property to S; i.e., where a thief has stolen O’s property. However, it is an error to make the statement that “whenever a “void” title is involved, O will still prevails against all subsequent purchasers if he chooses to replevy the property.” A void title can be procured under either of the exceptions, even under circumstances that rise to the level of criminal larceny.
Because, the first exception applies, let’s only deal with it . . .
Transaction of Purchase
Section 2-403(l) provides that a person with "voidable title has power to transfer a good title to a good faith purchaser for value."
The terms, "good faith," "purchaser" and "value" are defined in 1-201.
A classic example of voidable title is where O has been induced to sell goods by S's fraudulent misrepresentation.
1) As between O and S, O can avoid the contract for sale and recover the goods.
2) Between O and a GFP who has taken delivery, however, O loses!
Thus, despite O being a victim, the UCC will protect the GFP over O.
In addition to the fraudulent misrepresentation, 2-403(l) provides further that when "goods have been delivered under a transaction of purchase the purchaser has such power [to pass good title] even though:
(a) the transferor was deceived as to the identity of the purchaser, or
(b) the delivery was in exchange for a check which is later dishonored,
(c) it was agreed that the transaction was to be a “cash” sale, or
(d) the delivery was procured through fraud punishable as larcenous under the criminal law.
In these four scenarios, the purchaser has acquired a “voidable” title and O is at risk of not being able to replevin if S resells the property.
These four situations were included to:
1) clarify and expand B’s, the GFP, protection in a transaction of purchase
2) and to avoid the conclusion sometimes reached at common law that S's title was "void" rather than "voidable."
An example of "void" title would be where O was induced by fraud to sign a writing thinking it was a bailment agreement when in fact it was a contract for sale.
When a “void” tile is involved; i.e., O delivers goods to S and S resold them to a GFP, O could replevy them from the GFP because S got a "void" rather than "voidable" title. See Inmi-Etti v. Aluisi, 63 Md.App. 293, 492 A.2d 917 (1985).
Making substantive outcomes turn on such fine distinctions did not appeal to the drafters of the Code.
1) Note that S need not be a merchant and B need not be a BIOCB for good title to pass.
2) The key is whether delivery is under a "transaction of purchase" and whether B is a good faith purchaser (GFP) for value.