A Chapter 11 trustee will administer the bankruptcy cases of A. Jaffe, Firestar Diamond, and Fantasy Inc., the three companies owned by scandal-tarred billionaire Nirav Modi.
At a U.S. bankruptcy court hearing in New York City on June 7, Judge Sean Lane weighed putting the three companies into Chapter 7 liquidation, but ultimately decided that the appointment of a trustee “has more upside” and could help stabilize the businesses.
The appointment of a Chapter 11 trustee, as opposed to the standard “debtors in possession” arrangement, is a relatively rare remedy in bankruptcy cases and is generally reserved for cases where there is possible fraud. The trustee, who had not been named at press time, will take over the company and preside over the sale of its assets.
The debtors’ counsel, Ian Winters, did not oppose the appointment of the trustee, arguing the debtors wanted any action to occur as soon as possible to preserve the value of the company’s assets.
Last week, the U.S. Trustee William Harrington and two interveners—Punjab National Bank (PNB) and Indian Ministry of Corporate Affairs—called for the trustee’s appointment, citing the collapse of the proposed sale of A. Jaffe.
Parag Diamonds, also known as Paramount Gems, won the auction for A. Jaffe’s assets on May 3. Less than three weeks later, the debtor’s counsel withdrew the sales motion, after it was revealed in court that A. Jaffe president Mihir Bhansali had spoken to Modi following the company’s bankruptcy filing. Bhansali has since resigned from the company.
“The debtors and the banks wanted to get the sale done [quickly] for good economic reasons,” Lane said at the hearing this week. “When it came to light that Mr. Bhansali had spoken to Mr. Modi, that put a cloud on the sale. That cloud was unable to be lifted, in my view.”
“There is no panacea here,” he added. “It is a challenging case.”
At the start of the hearing, debtors’ counsel Winters said that the sale’s collapse had a “dramatic effect” on all three companies, with key personnel leaving. A. Jaffe, however, exhibited at last week’s JCK Las Vegas show and at LUXURY by JCK.
Sean O’Neal, counsel for PNB, noted at the hearing that some blamed his client for the sale’s collapse. But he argued that PNB was “the victim of an unprecedented fraud” by Modi. (Through his lawyer, Modi has denied the charges. His current whereabouts are unknown.)
Also, at the hearing, Fantasy Diamond Corp. filed a motion to cancel its 2012 license agreement with Firestar Diamond. That agreement gave Firestar the rights to Fantasy’s intellectual property.
While counsel for Fantasy wanted the issue be decided at the hearing this week, Judge Lane said he would adjourn the motion until the next court date, when he expected a Chapter 11 trustee would be appointed.
“There are a lot of conversations that the Chapter 11 trustee will need to have about pretty much everything in this case,” said Lane.