In re Firestar Diamond, Inc.
| Decision Date | 01 September 2022 |
| Docket Number | Case No. 18-10509 (SHL) (Jointly Administered) |
| Citation | 643 B.R. 528 |
| Parties | IN RE: FIRESTAR DIAMOND, INC., et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
643 B.R. 528
IN RE: FIRESTAR DIAMOND, INC., et al., Debtors.
Case No. 18-10509 (SHL) (Jointly Administered)
United States Bankruptcy Court, S.D. New York.
Signed September 1, 2022
JENNER & BLOCK LLP, Attorneys for the Firestar Diamond Liquidating Trustee, 919 Third Avenue, New York, New York 10022, By: Richard Levin, Esq., Carl Wedoff, Esq., -and- 353 North Clark Street, Chicago, Illinois 60654, By: Angela Allen, Esq.
HILL RIVKINS LLP, Attorneys for Claimants Union Bank of India (UK) Ltd. Bank of India (London Branch) Bank of India (Antwerp Branch), 45 Broadway, Suite 1500, New York, New York 10006, By: John J. Sullivan, Esq.
CONDON & FORSYTH LLP, Attorneys for Claimants Bank of India, Bharat, Diamond Bourse Branch 7 Times Square, 18th Floor, New York, NY 10036, By: Joseph E. Czerniawski, Esq., Matthew D. Emery, Esq.
MEMORANDUM OF DECISION
SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE
Before the Court is a motion filed by the liquidating trustee for the Firestar Diamond Liquidating Trust (the "Trustee") seeking summary judgment on his objection to the claims filed in this bankruptcy case by Bank of India (London Branch)
("BOI-L"), Bank of India (Antwerp Branch) ("BOI-A"), Union Bank of India (UK) Ltd. ("UBI"), and Bank of India, Bharat Diamond Bourse Branch ("BOI-B," and together with BOI-L, BOI-A, and UBI, the "Banks"). See ECF No. 1653.1 The Trustee makes two arguments.2 He argues that these claims do not belong to the Banks but rather to the non-debtor affiliates of the Debtor Firestar Diamond, Inc. ("FDI"). In the alternative, the Trustee contends that the claims were transferred to the Banks by these affiliates and thus are subject to disallowance under 11 U.S.C. Section 502(d) given that these affiliates received fraudulent transfers and preferences from the Debtors. The Banks have filed cross-motions for summary judgment. See ECF Nos. 1658, 1663. The Banks assert that their claims should not be disallowed because, among other things, they acquired rights of payment in the ordinary course of business before the bankruptcy, and the Banks’ claims are "obligations" owed by the Debtors rather than "transfers" of claims from affiliates of the Debtors.3 For the reasons set forth below, the Trustee's motion is granted and the Banks’ motions are denied.
BACKGROUND
The current dispute involves transactions between the Debtor FDI, the Banks, and three non-debtor subsidiaries of the Debtor FDI: Firestar Diamond International Private Limited, an Indian entity ("FDIPL"), Firestar Diamond BVBA, a Belgian entity ("BVBA"), and Firestar Diamond FZE, an Emirati entity ("FZE," and together with FDIPL and BVBA, the "Affiliates").4
The Debtor FDI operated a wholesale jewelry business in New York.5 FDI and two other U.S. corporations—A. Jaffe, Inc. ("A. Jaffe") and Fantasy, Inc. ("FI," and together with FDI and A. Jaffe, the "Debtors")—were part of the international diamond and jewelry business of Nirav Modi.6 Nirav Modi owned and controlled the Debtors and numerous other affiliated diamond and jewelry businesses in the United States, India, Belgium, Hong Kong, the United Kingdom, and the United Arab Emirates.7
FDI regularly purchased polished diamonds from the Affiliates.8 The Banks provided commercial banking services to the
Affiliates to finance these sales.9 Specifically, each of the Banks extended credit to the Affiliates and/or purchased the rights to payment on the Affiliates’ invoices issued to FDI.10 The affiliate FZE entered into its credit facility agreement with BOI-L on July 2, 2012, which was later amended and restated and further continued and extended as of April 4, 2016.11 The affiliate BVBA's "Credit Line" agreement with BOI-A was last renewed and extended on January 30, 2017.12 BVBA's Pledge of Receivables Agreement with UBI is dated October 16, 2014.13 The affiliate FDIPL's credit facility agreement with BOI-B is dated February 3, 2015.14
Under these arrangements, the Affiliates were authorized to draw funds from their credit facilities with the Banks to provide liquidity for the time between the shipment of the goods to FDI and the date of payment on the invoices issued to FDI.15 After each purchase of diamonds by FDI, the Affiliates issued invoices to FDI directing that FDI make payments directly to the Banks.16 The Affiliates subsequently requested and obtained draws under the
credit facilities based on the invoices issued to FDI.17 After the invoices were issued, the Affiliates would inform the Banks—by letter, by submission of an invoice, and/or by submission of proof of shipment—of each sale and of the Affiliates’ draws on their credit funds.18 As security for each draw from their credit facilities, the Affiliates pledged the underlying invoices and their accounts receivable to
the Banks.19 Two of the Banks—UBI and BOI-B—were explicitly granted the right to collect on the invoices as agents for the Affiliates.20 In addition to directing FDI to pay the Banks directly, the invoices further instructed that the payments made to the Banks were for the ultimate benefit of the Affiliates and that payments on the invoices were due between 120 to 152 days after the invoice date.21 In at least one instance, FDI stamped an invoice directing it to pay BOI-B 150 days after the shipment date as "accepted on 10-6-17."22 On at least one other occasion, a SWIFT document23 —referencing another invoice also due 150 days after the invoice date—was sent from FDI's bank to BOI-L indicating that the "draft was accepted by" FDI.24 At oral argument, the Trustee conceded that FDI agreed to pay the Banks on the invoices issued by the Affiliates. See Hearing Transcript ("Hr. Tr.") 39:12–13, 42:6–7, Dec. 9, 2021 [ECF No. 1684]. If the payments from FDI to the Banks exceeded the amounts outstanding on the Affiliates’ credit lines as to the Banks’ claims, the Banks would remit the excess to the Affiliates.25
Pre-dating the transactions at issue here, the Affiliates sold FDI diamonds,
and these sales were also financed by the Banks under the same credit facilities.26 For instance, between March and July 2017, FDIPL issued at least three invoices to FDI directing payment to BOI-B, all of which were paid in full by FDI.27 Similarly, between November 2014 and August 2016, FZE drew funds under its credit agreement with BOI-L for at least six sales of goods to FDI.28 After FDI received the invoices directing payment to BOI-L, FDI paid each invoice in full to BOI-L's account at Citibank in New York.29 Additionally, in the eighteen months leading up to the Petition Date, BVBA drew funds under its agreement with BOI-A on at least four occasions based on sales to FDI.30 BVBA issued invoices to FDI directing payment to BOI-A, and FDI paid the invoices in full to BOI-A's account.31 Finally, between April and October 2016, BVBA also drew funds under its credit facility with UBI based on at least three sales to FDI.32 After FDI received the invoices directing payment to UBI, FDI paid each invoice in full to UBI's account with Bank of America.33 Similar to the transactions at issue here, the Banks would also credit the Affiliates’ accounts—based on these previous transactions—and remit any funds they received in excess of the amounts drawn by the Affiliates.34
The Debtors filed for Chapter 11 protection on February 26, 2018. See ECF No. 1. A few months before the Debtors’ bankruptcy filing, Punjab National Bank ("PNB") filed a complaint against Nirav Modi and several associated entities in India, alleging "the largest bank fraud in Indian history" against PNB and other banks. See In re Firestar Diamond, Inc. , 615 B.R. 161, 162–64 (Bankr. S.D.N.Y. 2020) (" Firestar I "), vacated in part and remanded , 627 B.R. 804 (S.D.N.Y. 2021) ; Report of John J. Carney, Examiner at 4 (the "Carney Report") [ECF No. 394]. The Court appointed an examiner who investigated whether the Debtors and their senior officers and directors were involved in the alleged fraud and found substantial evidence to support their knowledge and involvement.35 Against this backdrop, the Court appointed Richard Levin as Chapter
11 Trustee in June 2018, and he has administered the Debtors’ estates since that time.36 After confirmation of a Chapter 11 liquidation plan in 2020, he was appointed as the Liquidating Trustee with all the Chapter 11 Trustee's rights and defenses as to disputed claims.37
The current dispute follows a remand from the District Court after a prior decision of this Court on the Banks’ claims. In the prior dispute, the Trustee had argued that the Banks’ claims were barred under Section 502(d) of the Bankruptcy Code because the Banks’ claims were transferred to the Banks by subsidiaries of the Debtors who had received millions of dollars in fraudulent transfers in a bank fraud scheme. See Firestar I , 615 B.R. at 164. The main point of contention addressed in this Court's prior decision was whether disallowance under Section 502(d) is a personal disability of the specific claimant or an attribute of the claim itself. See id. at 165–69 (addressing whether a claim disallowed under Section 502(d) should still be disallowed if the claim was transferred from its original owner). This Court decided that claims that are disallowable under Section 502(d) must be disallowed no matter who holds them. Id. at 167 (citing In re KB Toys Inc. , 736 F.3d 247, 252 (3d Cir. 2013) ). In other words, " Section 502 follows the claim, not the claimant." Id. at 168. Having found that Section 502(d) applied to the Banks’ claims, the Court went on to determine that the Banks’ claims were disallowed because "the claims are based on amounts owed to the entities that received fraudulent transfers from the Debtors in amounts exceeding the claims, and the claims would be subject to disallowance if those entities filed the claims." Id. at 169.
On appeal, the District Court agreed with this Court's conclusion that...
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