Levin v. Modi (In re Firestar Diamond, Inc.)

Citation634 B.R. 265
Decision Date15 October 2021
Docket NumberCase No. 18-10509 (SHL) (Jointly Administered),Adv. No. 19-01102 (SHL)
Parties IN RE: FIRESTAR DIAMOND, INC., et al., Debtors. Richard Levin, Chapter 11 Trustee of Firestar Diamond, Inc., et al., Plaintiff, v. Nirav Deepak Modi, Mihir Bhansali, and Ajay Gandhi, Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

JENNER & BLOCK LLP, Attorneys for the Chapter 11 Trustee, Richard Levin, Esq., 919 Third Avenue, New York, New York 10022, By: Carl N. Wedoff, Esq. 353 North Clark Street, Chicago, Illinois 60654, By: Vincent E. Lazar, Esq., Angela M. Allen, Esq., William A. Williams, Esq.

PATTERSON BELKNAP WEBB & TYLER LLP, Attorneys for Nirav Deepak Modi, 1133 Avenue of the Americas, Suite 2005, New York, New York 10036, By: Alejandro H. Cruz, Esq., Daniel A. Lowenthal, Esq., Daniel Ruzumna, Esq.

WHITE & WILLIAMS LLP, Attorneys for Mihir Bhansali, 7 Times Square, Suite 2900, New York, NY 10036, By: Thomas Butler, Esq., Nicole A. Sullivan, Esq.

SERPE RYAN LLP, Attorneys for Ajay Gandhi, 1115 Broadway, 12th Fl., New York, NY 10010, By: Silvia L. Serpe, Esq.

MEMORANDUM OF DECISION

Sean H. Lane, UNITED STATES BANKRUPTCY JUDGE

Before the Court are Nirav Deepak Modi's, Mihir Bhansali's, and Ajay Gandhi's (collectively, the "Defendants") motions to dismiss the First Amended Complaint of Richard Levin, Esq., the Chapter 11 Trustee appointed in the above-captioned bankruptcy cases (the "Trustee"). See Motion to Dismiss First Amended Adversary Complaint (the "Gandhi Motion") [ECF No. 36]; Motion to Dismiss Adversary Proceeding (the "Bhansali Motion") [ECF No. 38]; Motion to Dismiss Adversary Proceeding (the "Modi Motion") [ECF No. 42]. In their motions, Defendants seek, among other things, the dismissal of various claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). See Memorandum of Law of Defendant Ajay Gandhi at 15 [ECF No. 36] (the "Gandhi Memorandum"); Memorandum of Law of Defendant Mihir Bhansali at 28 [ECF No. 39] (the "Bhansali Memorandum"); Memorandum of Law of Defendant Nirav Deepak Modi at 18 [ECF No. 43] (the "Modi Memorandum"). Defendants present a variety of theories, including standing, failure to allege fraud with particularity, failure to adequately plead predicate acts under RICO, and statute of limitations. Defendants also seek dismissal of the Trustee's state law claims.1 Also before the Court is Defendant Mihir Bhansali's related Motion for Rule 11 Sanctions or to Strike Certain Pleadings (the "Sanctions Motion") [ECF No. 59]. For the reasons that follow, the Court denies the motions.

BACKGROUND

In late January 2018, 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) ; Report of John J. Carney, Examiner at 4 [ECF No. 394, Case No. 18-10509]. Approximately one month later, three U.S. corporations indirectly owned by Nirav Modi filed for Chapter 11 protection in the Southern District of New York: Firestar Diamond, Inc. ("FDI"), Fantasy, Inc. ("FI") and A. Jaffe, Inc. ("A. Jaffe," and together with FDI and FI, the "Debtors"). See ECF No. 1 [Case No. 18-10509]. Amidst a tumultuous, failed sale process of the Debtors’ assets and the resignation of the Debtors’ Chief Executive Officer ("CEO") Mihir Bhansali, the Court ordered the appointment of the Trustee in mid-June 2018. See ECF No. 227 [Case No. 18-10509]. The Trustee has administered the Debtors’ estates since June 2018.

In March 2019, the Trustee filed a complaint against the Defendants, see ECF No. 1, and an amended complaint some six months later, see Amended Complaint against Mihir Bhansali, Ajay Gandhi, Nirav Deepak Modi (the "First Amended Compl.") [ECF No. 28]. As is the case in a motion to dismiss, the facts of the complaint are taken as true. See BG Litig. Recovery I, LLC v. Barrick Gold Corp. , 180 F. Supp. 3d 316, 320 (S.D.N.Y. 2016).

While in business, the Debtors operated as wholesale diamond and bridal jewelry businesses. See First Amended Compl. ¶¶ 6–8. Defendant Nirav Deepak Modi ("Modi") is the former indirect controlling majority shareholder and/or de facto director, officer, or controlling person of the Debtors; Mihir Bhansali ("Bhansali") served as the sole director and CEO of each Debtor; and Ajay Gandhi ("Gandhi") served as the Chief Financial Officer ("CFO") of each Debtor. Id. ¶ 1.

Generally, the Trustee's action seeks to recover damages from harm inflicted by the Defendants on the Debtors and their estates as a result of

the Defendants’ six-year, extensive international fraud, money laundering, and embezzlement scheme that resulted in accrual of claims against the Debtors of over $1 billion in favor of Punjab National Bank, the diversion of millions of dollars of the Debtors’ assets for the benefit of the family of Nirav Modi and Mihir Bhansali, and the collapse of the Debtors and the resulting loss of value of their businesses.

Id. ¶ 1.

From approximately early 2011 to early 2018 (the "Relevant Period"), the Defendants orchestrated and carried out a scheme to "obtain loans, credits, or other funds under false pretenses and without collateral" from numerous banks (the "Bank Fraud"), including PNB, which is majority owned by the Indian government. Id. ¶ 23. The Bank Fraud involved the use of letters of undertaking ("LOUs"),2 a financial instrument unique to India designed to facilitate efficient import transactions. Id. ¶ 24. Modi and the co-conspirators sought to artificially inflate the import volumes of Modi's India-based companies with sham transactions so as to obtain more and more LOU funding in order to obtain even more LOU bank financing.3 Id. ¶¶ 26–27. To carry out this scheme, Modi and his co-conspirators used a web of shell companies known as the "Shadow Entities" based in Hong Kong and Dubai that posed as legitimate businesses to create fake import transactions and launder the proceeds.4 See id. ¶¶ 29–32. As the Amended Complaint explains:

Transactions involving the Shadow Entities either purported to transfer goods that did not exist, were never transferred, were transferred at prices having nothing to do with market value but instead based on whatever amounts were necessary to reconcile the Shadow Entities’ and Firestar Entities’5 books and records so as to conceal other transfers made for illegitimate purposes, or were transferred in "circular transactions," in which the same goods were exported from and re-imported among Modi-Controlled Entities multiple times at varying and often inflated prices to give the appearance of multiple distinct transactions for the sole purpose of artificially increasing the entities’ import volume.

Id. ¶ 35. PNB and the other defrauded banks are reported to have lost in excess of $1 billion as a result of the Bank Fraud. Id. ¶ 52.

The Defendants and their co-conspirators allegedly funneled millions of dollars in funds and diamonds through the Debtors in furtherance of the Bank Fraud, "both in circular transactions with Shadow Entities and other Modi-Controlled Entities to propagate the Bank Fraud and in noncircular transactions designed to launder the proceeds of the Bank Fraud" for Modi's and Bhansali's personal benefit. Id. ¶ 53. The Trustee lists examples of how the Debtors directly benefited from fraudulently issued LOUs and were involved in circular transactions until early 2013, when the Debtors no longer directly participated in import and export transactions underlying LOU issuances and instead received LOU proceeds indirectly through Shadow Entities. See id. ¶¶ 54–55, 57. At that point, the Shadow Entities themselves acted as intermediaries between the Firestar Entities and the LOU Entities. Id. ¶ 56. The Debtors would also make payments directly to Shadow Entities, ostensibly for the repayment of outstanding LOUs. Id. ¶ 58. The Debtors’ records reflect cash transfers to and from the Debtors and the Shadow Entities totaling approximately $227 million during the Relevant Period. Id. ¶ 60.

Bhansali and Gandhi acted in concert with Modi with respect to the Debtors’ participation in the Bank Fraud. Id. ¶ 61. In addition to his role as CEO of the Debtors, Bhansali served as CEO or director while Gandhi served as CFO for each entity in a group known as the "U.S. Affiliates."6 Id. ¶¶ 63–64. With Modi's oversight, Bhansali and Gandhi together were able to coordinate and direct fraudulent transfers "among the U.S. Entities, Shadow Entities, and other Modi-Controlled Entities involving hundreds of millions of dollars in funds and diamonds." Id. ¶ 63, 64. Bhansali and Gandhi each had authority to approve loose diamond transactions among the U.S. Entities and the Shadow Entities and were also signatories on each of the U.S. Entities’ bank accounts.7 Id. ¶ 65. While the examples listed are too numerous to discuss in detail here, the Trustee generally alleges that Defendants exercised oversight and control of the Shadow Entities and LOU Entities, exercised oversight and control over transactions between the Debtors and Shadow Entities, engaged in suspicious accounting, finance, and inventory practices, engaged in efforts to deceive or manipulate auditors and lenders, orchestrated transactions to divert assets from the Bank Fraud and the Debtors for the benefit of Modi's and Bhansali's families, and attempted to stonewall and disrupt investigations of the Bank Fraud before and after the Debtors’ bankruptcy filing. See id. ¶¶ 68–80, 81–83, 84–91, 92–102, 103–41, 142–172.

It is the Trustee's contention that each "Actual Fraudulent Transaction"8 gives rise to the right to avoid and recover the value of such transactions and that each Actual Fraudulent Transaction was made with actual intent to hinder, delay, or defraud the Debtors’ existing or future creditors. Id. ¶¶ 173–74. Moreover, the Trustee alleges that

• each Actual Fraudulent
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