18-10509-shl Doc 1156 Filed 10/18/19 Entered 10/18/19 16 ...
Transcript of 18-10509-shl Doc 1156 Filed 10/18/19 Entered 10/18/19 16 ...
Hearing Date and Time: November 18, 2019 at 11:00 a.m. EDT
Response Deadline: November 11, 2019 JENNER & BLOCK LLP Marc Hankin Carl Wedoff 919 Third Avenue New York, New York 10022 (212) 891-1600 Angela Allen (admitted pro hac vice) 353 North Clark Street Chicago, Illinois 60654 (312) 222-9350 Counsel for the Chapter 11 Trustee UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re: FIRESTAR DIAMOND, INC., et al.
Debtors.1
Chapter 11 No. 18-10509 (SHL) (Jointly Administered)
NOTICE OF TRUSTEE’S OBJECTION TO FILED
CLAIM OF SAUMIL DIAM LLC (FIRESTAR CLAIM NO. 35)
Richard Levin, not individually but as chapter 11 Trustee (the “Trustee”) for the bankruptcy estates of the Debtors in the above-captioned bankruptcy cases, has filed his Objection (the “Objection”) to the claim (“Claim”) filed by Saumil Diam LLC. The Objection seeks entry of an order (the “Proposed Order”), substantially in the form attached as Exhibit C to the Objection, disallowing the Claim in full.
Any response to the Objection must be filed with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) not later than November 11, 2019, and served so as to be received by counsel for the Trustee at the following address: Carl Wedoff, Jenner & Block LLP, 919 Third Avenue, New York, New York 10022.
Any response to the Objection should contain the following:
1 The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: Firestar Diamond, Inc. (2729), Fantasy, Inc. (1673), and Old AJ, Inc. f/k/a A. Jaffe, Inc. (4756).
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a. the name of the claimant and description of the basis for the amount of the Claim;
b. a concise statement setting forth the reasons why the Claim should not be disallowed as requested by the Trustee in the Objection, including, but not limited to, the specific factual and legal bases upon which the claimant will rely in opposing the Objection;
c. all documentation or other evidence of the Claim upon which the claimant will rely in opposing the Objection;
d. the address(es) to which the Trustee must return any reply to the claimant’s response, if different from the address(es) presented in the Claim; and
e. the name, address, and telephone number of the person (which may be the claimant or the claimant’s legal representative) possessing the ultimate authority to reconcile, settle, or otherwise resolve the Claim on behalf of the claimant.
A hearing on the Objection will be held on November 18, 2019 at 11:00 a.m. EST before the Honorable Sean H. Lane, United States Bankruptcy Judge, in the United States Bankruptcy Court for the Southern District of New York, One Bowling Green, Courtroom 701, New York, NY 10004, or before any other judge who may be sitting in his place and stead.
THE COURT MAY GRANT THE RELIEF DEMANDED BY THE OBJECTION WITHOUT FURTHER NOTICE OR HEARING IF YOU FAIL TO RESPOND TO THE OBJECTION IN ACCORDANCE WITH THIS NOTICE.
(Signature page follows.)
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Dated: October 18, 2019 New York, New York Respectfully submitted,
JENNER & BLOCK LLP By: /s/ Marc Hankin Marc Hankin Carl Wedoff 919 Third Avenue New York, New York 10022 (212) 891-1600 [email protected] [email protected] Angela Allen (admitted pro hac vice) 353 N. Clark St. Chicago, Illinois 60654 (312) 222-9350 [email protected] Counsel for the Chapter 11 Trustee
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Hearing Date and Time: November 18, 2019 at 11:00 a.m. EDT Response Deadline: November 11, 2019
JENNER & BLOCK LLP Marc Hankin Carl Wedoff 919 Third Avenue New York, New York 10022 (212) 891-1600 Angela Allen (admitted pro hac vice) 353 North Clark Street Chicago, Illinois 60654 (312) 222-9350 Counsel for the Chapter 11 Trustee UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re: FIRESTAR DIAMOND, INC., et al.
Debtors.1
Chapter 11 No. 18-10509 (SHL) (Jointly Administered)
TRUSTEE’S OBJECTION TO FILED
CLAIM OF SAUMIL DIAM LLC (FIRESTAR CLAIM NO. 35)
Richard Levin, Chapter 11 Trustee (the “Trustee”) of the debtors in these chapter 11
cases (the “Debtors”), files this Objection under section 502 of the Bankruptcy Code, 11 U.S.C.
§§ 1011532, and Rule 3007 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy
Rules”), requesting that the claim (Firestar Claim No. 35) (the “Claim”) filed by Saumil Diam
LLC (“Saumil”) against Firestar Diamond, Inc. (“FDI” or “Firestar”) be disallowed in full. In
support of this Objection, the Trustee states:
1 The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: Firestar Diamond, Inc. (2729), Fantasy, Inc. (1673), and Old AJ, Inc. f/k/a A. Jaffe, Inc. (4756).
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JURISDICTION AND VENUE
1. This Court has jurisdiction over the Objection under 28 U.S.C. § 1334. This is a
core proceeding under 28 U.S.C. § 157(b). The Trustee consents to the entry of a final order by
this Court.
2. Venue is proper in this district under 28 U.S.C. § 1409.
3. This Objection is made under sections 105(a) and 502 of the Bankruptcy Code, 11
U.S.C. §§ 1011532, and Bankruptcy Rules 3007 and 9014.
BACKGROUND
4. On February 26, 2018, the Debtors filed petitions under chapter 11 in this Court.
On March 9, 2018, this Court entered an Order directing that the Debtors’ cases be jointly
administered. [Dkt. 24.]
5. On June 14, 2018, the United States Trustee for Region 2 appointed Richard Levin
as the trustee in the Debtors’ jointly administered cases [Dkt. 222], which this Court approved
the same day. [Dkt. 227.]
A. The Bank Fraud.
6. As detailed by (a) the Indian Central Bureau of Investigation; (b) the Directorate
of Enforcement, Ministry of Finance for the Department of Revenue of India; (c) the Indian
Ministry of Corporate Affairs; and (d) two recent rulings by the Indian Debt Recovery Tribunal,
and as supported by the Trustee’s own investigation, beginning no later than 2011 and
continuing into 2018, Nirav Modi orchestrated a fraudulent scheme to obtain approximately $4
billion in financing under false pretenses from financial institutions, including Punjab National
Bank (“PNB”), and to launder the proceeds through a global web of corporate entities, family
members, and co-conspirators (the “Bank Fraud”).
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7. The Bank Fraud involved the fraudulent procurement of letters of undertaking
(“LOU”), a financial instrument unique to India designed to facilitate efficient import
transactions. When used legitimately, LOUs allow an importer to forego the expense an
importer would otherwise incur by borrowing Indian currency and then converting it to a
foreign currency to pay foreign suppliers. Instead, the importer obtains short-term credit from
its bank in India, secured by invoices for the to-be imported goods. The issuing bank, in turn,
enters into the foreign currency transaction: it requests a foreign branch of another Indian bank
to transmit funds into the issuing bank’s own account (referred to as its nostro—“our”—
account) at the foreign branch of a third bank to pay the exporter in its local foreign currency.
The issuing bank then recoups the loan from the importer (or the imported goods serving as its
collateral).
8. Since each LOU requires an import transaction, an importer’s LOU borrowing
capacity is tied directly to its import volume—the more imports, the more LOU funding
available. Modi and his co-conspirators conspired to artificially inflate the import volume of
Modi’s India-based companies—most notably Diamonds R Us, Solar Export, and Stellar
Diamond (collectively, the “LOU Entities”)—with sham transactions so as to obtain more and
more LOU funding.
9. To carry out this scheme, Modi and other co-conspirators utilized a web of
shadow entities, including Hong Kong-based Eternal Diamonds Corp., to engage in fraudulent
and fictitious import transactions (the “Shadow Entities”). Though designed to look like
legitimate independent businesses, the Shadow Entities were no more than shell companies
controlled by Modi and his co-conspirators. They conducted little to no legitimate business, but
instead existed only to further the Bank Fraud by conducting bogus transactions with entities
under the corporate umbrella of India-based Firestar International Limited (f/k/a Firestar
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International Private Limited) (“FIL”), including the Debtors and India-based Firestar Diamond
International Private Limited (“FDIPL”), (collectively, the “Firestar Entities,” and together with
the Shadow Entities, LOU Entities, and all other entities controlled by Nirav Modi and his
family members, the “Modi-Controlled Entities”).
10. The Shadow Entity import transactions purported to involve arm’s-length sales
of highly valuable loose diamonds. In truth, these transactions routinely involved goods that
(a) did not exist; (b) were never transferred; (c) 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’ books and records so as to conceal other transfers made
for illegitimate purposes; or (d) were transferred in “circular transactions,” meaning the same
diamonds were exported from and re-imported back into India multiple times at varying and
often inflated prices, in transactions involving various Firestar Entities and Shadow Entities to
give the appearance of multiple distinct transactions for the sole purpose of artificially
increasing the entities’ import volume.
11. In the context of the Bank Fraud, transactions between and among Firestar
Entities and Shadow Entities furthered the Bank Fraud by: (a) inflating the Indian entities’ LOU
borrowing capacity by artificially inflating their import and export volume (for LOUs and
packing credit loans, respectively); (b) facilitating the repayment of outstanding LOUs and
packing credit loans; (c) laundering the fraudulent proceeds by making them difficult to trace
and siphoning them to Nirav Modi and his co-conspirators; and (d) manipulating auditors,
lenders, and regulatory bodies.
12. Transfers for these purposes were concealed in various ways, including:
(a) round-trip transactions of gems or funds in which Modi-Controlled Entities transferred
assets amongst themselves without any legitimate economic purpose; (b) buying and selling
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gems at inflated or deflated prices (or not sending the gems at all); (c) characterizing transfers as
loans or loan repayments or advances against future purchases or returns of advances, etc.; and
(d) in some instances, fraudulently doctoring books and records outright.
13. The Bank Fraud was exposed in January 2018 after PNB denied issuance of a new
LOU and began investigating the borrowing practices of Modi-Controlled Entities. In the weeks
leading up to and following the exposure of the Bank Fraud, Modi and his co-conspirators
implemented various measures designed to remove assets from the reach of creditors. One key
element of this plan was to ship all U.S.-based inventory to Modi-Controlled Entities in Hong
Kong such as Eternal Diamonds Corp. (“Eternal”), a Shadow Entity. Although these shipments
to Hong Kong were disguised as sales on paper, the various Hong Kong entities never actually
paid the U.S. entities. Instead, the U.S.-based entities were left holding worthless accounts
receivable.
14. As discussed below, the transaction underlying Saumil’s Claim appears to be
directly connected to such fraudulent efforts.
B. Saumil’s Relationship with Modi-Controlled Entities.
15. Saumil is a New York-based limited liability company owned by Mitesh Kothari.
From as early as 2013, Saumil and other entities linked to Mitesh Kothari transacted extensively
with various Modi-Controlled Entities, as well as with entities controlled by Nirav Modi’s
uncle, Mehul Choksi, who is accused of running his own version of the Bank Fraud through
entities such as Gitanjali Group and Samuels Jewelers.
16. In a federal complaint filed against Nirav Modi and Mehul Choski, among
others, on September 23, 2019 in the U.S. District Court for the Southern District of New York,
Saumil and Kothari described the genesis and nature of their relationship with Modi, Choksi,
and their respective companies as follows:
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Defendant NEENA SHETH proposed that DIAMLINK, INC. and other associated companies could ship the merchandise to Plaintiff SAUMIL DIAM LLC, which would, in turn, ship the merchandise to DIAMLINK’s customer, utilizing its own business line of credit and credit insurance to cover the usual 120 to 150-day payment terms and the risk associated with such a lengthy wait for payment, adding a varying small percentage to the amount to be collected from the customer, as SAUMIL DIAM LLC’s profit.
. . . After a year or two engaged in this type of cooperation, Defendants NEENA SHETH and NEHAL MODI invited Plaintiff MITESH KOTHARI to travel to Mumbai, India to meet Defendant MEHUL CHOKSI, Defendant NEENA SHETH’s brother, and NIRAV MODI, Defendant NEHAL MODI’s brother and Defendant NEENA SHETH’s nephew. Plaintiff MITESH KOTHARI traveled to Mumbai and met with Defendant MEHUL CHOKSI, owner of the GITANJALI GROUP, in his office, where Defendant MEHUL CHOKSI cited the same credit insurance limitations, and proposed similar cooperative arrangement between the GITANJALI GROUP and Plaintiff SAUMIL DIAM LLC, where SAUMIL DIAM LLC would be a customer of GITANJALI GROUP. Defendant MEHUL CHOKSI’s proposal included SAUMIL DIAM LLC’s fulfilling GITANJALI GROUP’s customer’s orders.
. . . On the same trip, Plaintiff MITESH KOTHARI met Defendant NIRAV MODI and Defendant NEESHAL MODI, who made similar proposals for cooperation between Plaintiff SAUMIL DIAM LLC and the FIRESTAR GROUP, and they introduced Plaintiff MITESH KOTHARI to Defendant MIHIR BHANSALI, CEO of FIRESTAR, INC., New York.
(Case No. 19-cv-8722, Dkt. 1, at ¶¶ 47, 53-55, 57 (emphasis in original).)
17. Consistent with these allegations, FIL and FDIPL each shipped substantial
amounts of diamonds and jewelry to Saumil. For example, as of December 31, 2017, Saumil
owed FIL and FDIPL accounts receivable of $26,928,340 and $2,849,660, respectively.
18. Saumil and Kothari also allege in their complaint that, in January 2018, they first
learned of PNB’s investigation into Modi and Choksi:
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Suddenly, in January, 2018, Defendant MEHUL CHOKSI came to the [sic] New York and [told] Plaintiff MITESH KOTHARI that there was some sort of misunderstanding with the Punjab National Bank (“PNB”), but that he hoped Defendant NEHAL MODI would be able to straighten it out within a short time, and asked me to hold any transactions for them. Around the same time, Plaintiff MITESH KOTHARI also met with NIRAV MODI, who also held up further transactions, due to the “misunderstanding” with PNB, and he expressed confidence that Defendant NEHAL MODI, who had been dispatched to India, would sort everything out. By March, 2018, word came from all of the defendants that the PNB issue had not been sorted out, and all transactions with any of their companies would cease indefinitely. The defendants informed Plaintiff MITESH KOTHARI that it was likely that the Indian government would come after SAUMIL DIAM LLC and other companies formed as part of the plaintiffs’ cooperation with the defendants.
(Case No. 19-cv-8722, Dkt. 1, at ¶¶ 64-67 (emphasis in original).)
19. On November 30, 2017, just weeks prior to the exposure of the fraud, Ajay
Gandhi (on behalf of FDI) and Saju Palose (on behalf of FIL and FDIPL) executed agreements
under which FDI became entitled to receive a 1.25% commission on all sales by FIL or FDIPL to
Saumil. The agreements were back-dated to April 1, 2017, presumably so that FDI could receive
a commission on the substantial sales to Saumil from April 2017 onwards. The same day the
agreements were executed, FDI issued invoices to FIL and FDIPL for royalty payments of
$489,829 and $102,301, respectively, under the terms of the agreements.
C. January 2018 Transactions Between Saumil, FDI, and Eternal.
20. Under Memo No. 11924, dated January 18, 2018, Saumil purportedly delivered
42 parcels of “mix polish diamonds” totaling 2,298.54 carats to FDI at a total price of
$329,997.90. Memo No. 11924 was accompanied by a packing list indicating the total carat
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weight for each of the 42 lots. The packing list also assigned an “SR No.” to each of the 42 lots
(ranging from 1 to 42).
21. Saumil issued Invoice No. 3207, dated January 18, 2018, to FDI in connection
with Memo No. 11924. Invoice No. 3207 describes the goods as “mix polish diamonds total 42
parcels” having a weight of 2,298.54 carats and a total value of $329,997.90. FDI booked
Purchase Receipt No. 11957400, dated January 19, 2018, in connection with this transaction,
which indicated that FDI received 2,298.54 carats of Item No. DR_RN900010, described as “DIA.
RD .10 RN9”, from Saumil.
22. FDI’s check register reflects a payment of $329,997.90 to Saumil posted on
February 5, 2018.
23. On January 23, 2018, the following adjustments were posted to FDI’s accounting
system under the heading “Assortment – Saumil Diam Memo #11924/Inv 3207 (1/18/2018)”:
Upon information and belief, these adjustments were designed to reallocate the diamonds
among different item numbers (which normally track the diamonds’ size, shape, quality, and
other characteristics) so as to make them difficult to trace in subsequent sales.
24. Under Invoice No. 15339415, dated January 24, 2018, FDI purported to sell
Eternal a total of five lots of loose diamonds, the first four of which reflected carat weights
identical to the lots Saumil delivered to FDI under Memo No. 11924, but with item numbers
consistent with the January 23, 2018 accounting adjustments, as set forth in the below excerpt
from Invoice No. 15339415:
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25. Additionally, the Trustee recovered a spreadsheet entitled “ETERNAL
DIAMONDS CORP LTD HK 01-23-2018” (the “First Spreadsheet”) from the computer of FDI’s
sourcing manager, Rebecca Chow. The spreadsheet contains three tabs. The first tab, labeled
“Orig”, contains rows for 43 lots of loose diamonds and columns indicating, among other
things, for each lot: (1) the SR No. (which, for SR. Nos. 1-42, matched the packing list
accompanying Memo No. 11924); (2) the total number of carats; (3) the price per carat; (4) the
total cost; (5) the price per carat less 25%; and (6) the total cost less 25%. The first 42 lots total
2,298.55 carats and a total discounted cost of $330,371.81. The final lot consists of 21.09 carats
and a cost of $39,143.04. The first tab also contained calculations of the sale price necessary to
achieve a 13.32% margin on each of the lots.
26. The second tab, labeled “Packing List”, lists the same 42 lots in four groupings
totaling 338.32 carats, 603.19 carats, 495.11 carats, and 861.93 carats, respectively.
27. The third tab contains the following table:
Item No. Cts PPC Total Location Invoice To
DTC_SNS000020 495.11 $132.00 $65,354.52 LOOSE 3 ETERNAL DIAMONDS CORP
LTD - HK
DR_RN900005 861.93 $140.00 $120,670.20 LOOSE 3 ETERNAL DIAMONDS CORP
LTD - HK
DR_RN900007 603.19 $160.00 $96,510.40 LOOSE 3 ETERNAL DIAMONDS CORP
LTD - HK
DR_RN900025 338.32 $305.00 $103,187.60 LOOSE 3 ETERNAL DIAMONDS CORP
LTD - HK
DR_JVS200050 21.09 $1,925.00 $40,598.25 LOOSE 3 ETERNAL DIAMONDS CORP
LTD - HK 2319.64 $426,320.97
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28. Thus, the First Spreadsheet confirms that FDI’s transactions with Saumil and
Eternal in January 2018 involved the same stones, i.e. that FDI purported to immediately ship to
Eternal the same stones it had just purportedly purchased from Saumil.
29. Under House Airway Bill No. 1728953, dated January 24, 2018, FDI purportedly
shipped the diamonds listed on Invoice No. 15339415 to Eternal in Hong Kong. FDI never
received payment from Eternal. FDI’s books and records continue to reflect $1,215,461 in
accounts receivable owed by Eternal, consisting of $426,321 on account of Invoice No. 15339415
and $789,140 on account of Invoice No. 15340724 described below.
30. As discussed above, Saumil admitted it first learned of PNB’s investigation into
Modi in January 2018 and that transactions with Modi were being “held up” as a result.
D. February 2018 Transactions Between Firestar, Saumil, and Eternal.
31. Still, under Memo No. 11926, dated February 1, 2018, Saumil purportedly
delivered 57 parcels of “mix polished diamond[s]” totaling 4,443.05 carats to FDI at a total price
of $619,917.00.
32. Saumil issued Invoice No. 3208, dated February 1, 2018, to FDI in connection
with Memo No. 11926. Invoice No. 3208 describes the goods as “mix polish diamonds 57
parcels” having a weight of 4,443.05 carats and a total price of $619,917.00. The version of
Invoice No. 3208 recovered from FDI’s books and records is different from the version attached
to Saumil’s proof of claim. The version attached to Saumil’s proof of claim lists a due date of
April 2, 2018 and payment terms of 60 days. By contrast, FDI’s version lists a due date of
February 1, 2018 and payment terms of 15 days. Additionally, whereas Saumil’s version states
only the total carat weight, FDI’s version contains a breakdown of the diamonds into six lots
consistent with the lots subsequently sold to Eternal, as discussed below.
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33. FDI booked Purchase Receipt No. 11958155, dated February 2, 2018, in
connection with this transaction, which indicated that FDI received a total of 4,443.05 carats of
loose diamonds from Saumil, as summarized in the below excerpt from the purchase receipt:
34. Under Invoice No. 15340724, dated February 6, 2018, FDI purported to sell
Eternal a total of eight lots of loose diamonds, the first six of which were identical to the six lots
listed on Purchase Receipt No. 11958155, as set forth in the below excerpt from Invoice No.
15340724:
35. Under House Airway Bill No. 1730021, dated February 6, 2018, FDI purportedly
shipped the diamonds listed on Invoice No. 15340724 to Eternal in Hong Kong. As noted above,
FDI never received payment from Eternal on this invoice.
36. Rebecca Chow’s computer also contained a spreadsheet entitled “Saumil Diam
LLC Inv 3208 4443.05cts Packing List 02-01-2018” (the “Second Spreadsheet”) which is largely
analogous to the First Spreadsheet. As before, the Second Spreadsheet contains three tabs. The
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first tab, labeled “Orig”, contains rows for 57 lots of loose diamonds and columns indicating,
among other things, for each lot: (1) the SR No.; (2) the total number of carats; (2) the price per
carat; and (3) the total cost. Each lot in the Second Spreadsheet from SR No. 1 through SR No. 42
is identical in carat weight, price per carat, and total price to the entries listed as SR No. 1
through SR No. 42 in the First Spreadsheet (and therefore items SR No. 1 through SR. 42 of the
packing list accompanying Memo No. 11924). Like the First Spreadsheet, the second and third
tabs of the Second Spreadsheet contain the groupings by item number and margin calculations
to determine the eventual sale price to Eternal.
37. The lots listed as SR No. 43 through SR No. 57 in the Second Spreadsheet have
no counterpart in the First Spreadsheet, nor in any packing list in FDI’s books and records. The
Trustee has not been able to locate any packing list created in connection with Memo No. 11926.
38. In sum, based upon a thorough review of the books and records surrounding
Saumil’s January and February 2018 transactions with FDI, the Trustee has concluded that the
same stones were purportedly transferred from Saumil to FDI to Eternal in January 2018, and
then again from Saumil to FDI to Eternal in February 2018.
E. Saumil’s Proof of Claim.
39. On September 11, 2018, Saumil filed its Claim in the general unsecured amount
of $619,917 based on “goods sold (diamonds).” In support of its Claim, Saumil attached: (a) a
copy of Invoice 3208 (which, as discussed above, is different from any version found in FDI’s
files); (b) a statement reflecting the amount owed by FDI as of August 22, 2018; and (c) a copy of
Memo No. 11926 (again without any packing list).
RELIEF REQUESTED
40. The Trustee respectfully requests that the Court enter an order, substantially in
the form attached hereto as Exhibit C, disallowing the Claim in full.
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BASIS FOR RELIEF
41. A claim, once filed, is allowed unless a party in interest objects. See 11 U.S.C. §
502(a). A proof of claim filed in accordance with the Bankruptcy Rules constitutes prima facie
evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). However, if an
objecting party provides sufficient evidence to rebut the claim, the burden shifts back to the
claimant to establish the validity of its claims by a preponderance of the evidence. See id.
I. Saumil’s Claim Should Be Disallowed as Unenforceable Under Section 502(b)(1).
42. Section 502(b)(1) of the Bankruptcy Code provides for the disallowance of any
claim that “is unenforceable against the debtor and property of the debtor, under any
agreement or applicable law for a reason other than because such claim is contingent or
unmatured.” 11 U.S.C. § 502(b)(1). “An example of an ‘unenforceable’ claim would be a[n] . . .
obligation that has already been satisfied or that is prohibited by law based on a legal
determination of a court of competent jurisdiction.” In re Dobbs, 597 B.R. 74, 78 (Bankr. E.D.N.Y.
2019).
43. Even “[i]f a contract is not itself unlawful, the bargain may still be illegal if it is
closely connected with an unlawful act.” Contemporary Mission, Inc. v. Bonded Mailings, Inc., 671
F.2d 81, 83 (2d Cir. 1982) (citing McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465 (1960));
accord Deligiannis v. PepsiCo, Inc., 757 F.Supp. 241, 253 (S.D.N.Y. 1991) (“Even if [a] contract [is]
entirely legal, public policy will deny its enforcement if its performance would practice fraud on
[a] third party.”); Ross v. Bolton, 1991 WL 285619, at *2 (“As a knowing participant in an illegal
scheme [a plaintiff] cannot invoke judicial power to enforce a contract which is a dominant part
of such scheme.”).
44. Saumil’s Claim is unenforceable for both of these reasons. First, as discussed
above, the February 2018 invoice underlying Saumil’s Claim involved the exact same diamonds
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Saumil purportedly sold to FDI in January 2018 and which FDI purportedly sold to Eternal
immediately thereafter. Since FDI paid the January 2018 invoice in full, Saumil’s Claim is
unenforceable to the extent it seeks additional payment on account of those same purported
diamonds.
45. Second, and more fundamentally, the facts and circumstances discussed above
demonstrate that both the January and February transactions, at a minimum, furthered broader
efforts to perpetrate the Bank Fraud and hinder, delay, and defraud creditors, and very well
might themselves have been fictitious and falsified outright. Specifically, the Trustee bases this
conclusion upon, among other things: (a) the timing of these transactions immediately after
exposure of the Bank Fraud; (b) the fact that the goods at issue were ultimately shipped to
shadow entity Eternal in Hong Kong without payment, consistent with the conspirators’ known
modus operandi; (c) the fact that, given Saumil’s own description of its arrangement with Nirav
Modi and the substantial accounts receivable owed by Saumil to FIL and FDIPL at the time,
Saumil likely sourced the goods at issue from FIL or FDIPL in the first place; (d) the
unmistakable overlap between the purportedly distinct January and February 2018 sequences
made clear by the First Spreadsheet and Second Spreadsheet, including the Second
Spreadsheet’s reference to SR Nos. 1-42, each of which matched SR Nos. 1-42 of the First
Spreadsheet and SR Nos. 1-42 of the January packing list; (e) the Second Spreadsheet’s reference
to SR Nos. 43-57, which did not exist on the January packing list or any other document in FDI’s
books and records; (f) the fact that the diamonds involved were repeatedly regrouped and
assigned different item numbers so as to render them difficult to trace; and (g) the discrepancies
between versions of the invoice attached to the Claim.
46. Given the suspicious nature of the transactions underlying Saumil’s Claim and
their undeniable link to the broader fraud, enforcing Saumil’s Claim would unfairly prejudice
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the Debtors’ truly innocent creditors whose recoveries should not be diluted by claims based
solely on the bogus transactions comprising the Bank Fraud and subsequent efforts to shield
assets from creditors. Nor is this result unfair to Saumil. Saumil, by its own admission, was
aware of PNB’s investigation in January 2018. That did not stop Saumil from, in February 2018,
purportedly selling FDI the same stones Saumil had purportedly just sold FDI less than two
weeks earlier. As such, Saumil was, at best, willfully negligent and, at worst, a knowing
participant in the misconduct. Either way, permitting Saumil to recover on account of its Claim
would “practice fraud” on FDI’s truly innocent creditors. See Deligiannis, 757 F. Supp. at 253.
The Court should therefore disallow Saumil’s Claim under section 502(b)(1) as unenforceable
under applicable nonbankruptcy law. See id.; 11 U.S.C. § 502(b)(1).
II. Saumil’s Claim Should Be Disallowed Under Section 502(d).
47. Section 502(d) of the Bankruptcy Code requires the court to disallow any claim of
a creditor who has received a preference or fraudulent transfer unless the creditor has satisfied
the liability for the preference or fraudulent transfer. 11 U.S.C. § 502(d).
48. Section 548 of the Bankruptcy Code provides for the avoidance of any transfer of
an interest of the debtor in property, or any obligation incurred by the debtor, made or incurred
within two years prior to the petition date, if the debtor voluntarily or involuntarily made such
transfer or incurred such obligation with actual intent to hinder, delay, or defraud any existing
or future creditor. See 11 U.S.C. § 548(a)(1). Similarly, a transfer made with actual intent “to
hinder, delay, or defraud either present or future creditors” may be avoided as an actual
fraudulent transfer under New York Debtor & Creditor Law (“DCL”) section 276. See HBE
Leasing Corp. v. Frank, 61 F.3d 1054, 1057 (2d Cir. 1995). Section 544(b) of the Bankruptcy Code
permits the Trustee to use avoidance powers available to creditors under the DCL. See 11 U.S.C.
§ 544(a).
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49. Based on the facts and circumstances alleged above, there is strong evidence that
both the $329,997.90 payment Firestar made to Saumil in February 2018 and the related
diversion of inventory to Hong Kong were designed to deplete FDI’s assets so as to hinder,
delay, or defraud FDI’s creditors in the wake of the Bank Fraud’s exposure. As such, the
$329,997.90 payment is subject to avoidance as a fraudulent transfer under the New York
Debtor and Creditor Law and sections 544 and 548 of the Bankruptcy Code.
50. In addition, this payment is subject to avoidance as a preferential transfer under
section 547 of the Bankruptcy Code. A transfer may be avoided as a preference if it (1) was a
transfer of an interest of the debtor in property; (2) was made to or for the benefit of a creditor;
(3) was made for or on account of an antecedent debt owed by the debtor before such transfer
was made; (4) was made while the debtor was insolvent; (5) was made on or within 90 days
before the date of filing of the petition; and (6) enabled the transferee to receive more than it
would have received had the case been a chapter 7 liquidation and the creditor not received the
transfer. See 11 U.S.C. § 547(b). Firestar, which was insolvent at all relevant times, transferred
the $329,997.90 to Saumil in early February 2018—well within the 90-day preference period—on
account of Invoice No. 3207 issued on January 18. This payment enabled Saumil to receive more
than it would have in a hypothetical liquidation because the $329,997.90 payment fully paid off
Invoice No. 3207 and Firestar lacked sufficient assets to pay its creditors in full. This payment is
therefore subject to avoidance as a preference under section 547(b) of the Bankruptcy Code.
51. Consequently, as Saumil has received at least one fraudulent transfer and/or
preference that it has not repaid, its Claim is subject to disallowance under section 502(d) of the
Bankruptcy Code. See 11 U.S.C. § 502(d).
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RESERVATION OF RIGHTS
52. Nothing in this Objection should be construed as the Trustee conceding the
validity of Saumil’s Claim or any other claim. The Trustee’s claims analysis continues, and this
Objection is one of many the Trustee anticipates filing. Therefore, the Trustee expressly
reserves the right to object to any or all of the claims filed or deemed filed against the Debtors’
estates, including other claims brought by Saumil, on any proper basis whatsoever. The Trustee
further reserves the right to bring any and all claims the Debtors’ estates might have against
Saumil, including any avoidance claims based on any transfer made or obligation incurred to or
for the benefit of Saumil.
NOTICE
53. The Trustee has provided notice of this Motion to: (a) the Office of the United
States Trustee; (b) all parties who have formally requested notice in the Debtors’ cases; and
(c) Saumil.
WHEREFORE, the Trustee respectfully requests that this Court enter an Order
substantially in the form of the attached proposed order and grant such other and further relief
as this Court deems just and proper.
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Dated: October 18, 2019, New York, New York Respectfully submitted,
JENNER & BLOCK LLP By: /s/ Marc Hankin Marc Hankin Carl Wedoff 919 Third Avenue New York, NY 10022 (212) 891-1600 [email protected] [email protected] Angela Allen (admitted pro hac vice) 353 N. Clark St. Chicago, Illinois 60654 (312) 222-9350 [email protected] Counsel for the Chapter 11 Trustee
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Exhibit A Saumil’s Proof of Claim (Firestar Claim No. 35)
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18-10509-shl Doc 1156-1 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit A Pg 2 of 8
18-10509-shl Doc 1156-1 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit A Pg 3 of 8
18-10509-shl Doc 1156-1 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit A Pg 4 of 8
18-10509-shl Doc 1156-1 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit A Pg 5 of 8
18-10509-shl Doc 1156-1 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit A Pg 6 of 8
18-10509-shl Doc 1156-1 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit A Pg 7 of 8
18-10509-shl Doc 1156-1 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit A Pg 8 of 8
Exhibit B Declaration of Richard Levin
18-10509-shl Doc 1156-2 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit B Pg 1 of 3
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re: FIRESTAR DIAMOND, INC., et al.
Debtors.1
Chapter 11 No. 18-10509 (SHL) (Jointly Administered)
DECLARATION OF RICHARD LEVIN IN
SUPPORT OF OBJECTION TO FILED CLAIM OF SAUMIL DIAM LLC (FIRESTAR CLAIM NO. 35)
I, Richard Levin, declare the following is true to the best of my knowledge, information,
and belief:
1. I am the chapter 11 trustee (“Trustee”) of the Debtors in the above-captioned
chapter 11 cases.
2. I submit this Declaration in support of my objection to the claim of Saumil Diam
LLC (the “Saumil Claim”) (Firestar Claim No. 35).
3. The statements in this Declaration are based on my personal knowledge,
information supplied or verified by my professionals, my review of relevant documents, or my
opinion based upon my experience and knowledge of the Debtors’ operations and financial
condition. If called as a witness, I could and would testify competently to the facts set forth
herein.
4. In my position as Trustee, I am generally familiar with the Debtors’ books and
records (“Books and Records”) that reflect, among other things, the Debtors’ liabilities and the
amounts owed to creditors as of the Petition Date. My professionals and I have reviewed and
1 The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: Firestar Diamond, Inc. (2729), Fantasy, Inc. (1673), and Old AJ, Inc. f/k/a A. Jaffe, Inc. (4756).
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2
continue to review the Debtors’ Books and Records to determine the validity of claims asserted
against the Debtors in these chapter 11 cases.
5. In connection with preparation of the Objection, I oversaw the review of the
Books and Records with respect to the Saumil Claim, reviewed the Objection; and reviewed and
approved the information contained on the Objection and the justifications set forth therein.
My professionals and I have performed specific due diligence as to the Saumil Claim and have
information supporting my position. Accordingly, I am familiar with the information contained
in the Objection.
6. I have reviewed and am generally familiar with each document referenced in the
Objection to the Saumil Claims.
7. I have reviewed and am familiar with the evidence detailed by (1) the Indian
Central Bureau of Investigation; (2) the Directorate of Enforcement, Ministry of Finance for the
Department of Revenue of India; (3) the Indian Ministry of Corporate Affairs; and (4) two recent
rulings by the Indian Debt Recovery Tribunal that Nirav Modi orchestrated a fraudulent
scheme to obtain approximately $4 billion in financing under false pretenses from financial
institutions, including PNB, and to launder the proceeds through a global web of corporate
entities, family members, and co-conspirators.
8. Accordingly, based on the review described above, I am informed and believe
that the facts contained in the Objection are true and correct.
I declare under penalty of perjury under 28 U.S.C. § 1746 that the foregoing is true and
correct.
Dated: October 18, 2019, /s/ Richard Levin New York, New York Richard Levin
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Exhibit C Proposed Order
18-10509-shl Doc 1156-3 Filed 10/18/19 Entered 10/18/19 16:47:56 Exhibit C Pg 1 of 3
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re: FIRESTAR DIAMOND, INC., et al.
Debtors.1
Chapter 11 No. 18-10509 (SHL)
(Jointly Administered)
[PROPOSED] ORDER GRANTING OBJECTION TO FILED
CLAIM OF SAUMIL DIAM LLC (FIRESTAR CLAIM NO. 35)
Upon consideration of the Objection to Filed Claim of Saumil Diam LLC (the “Objection”)
filed by Richard Levin in his capacity as Trustee of the three Debtors in these jointly
administered cases (the “Trustee”), seeking entry of an order under section 502(d) of title 11 of
the United States Code (the “Bankruptcy Code”), and Rule 3007 of the Federal Rules of
Bankruptcy Procedure (the “Bankruptcy Rules”), disallowing Saumil Diam LLC’s claim
(Firestar Claim Dkt. 35) (the “Claim”), as more fully described in the Objection; and appropriate
notice under the circumstances of the Objection having been provided, and it appearing that no
other or further notice need be provided; and the Court having found and determined that the
legal and factual bases set forth in the Objection establish just cause for the relief granted herein;
and after due deliberation and sufficient cause appearing therefor, it is
ORDERED that the Objection is sustained; and it is further
ORDERED that Claim No. 35 filed by Saumil Diam LLC against Firestar Diamond, Inc.
identified in the Objection is disallowed for the reasons stated in the Objection; and it is further
1 The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: Firestar Diamond, Inc. (2729), Fantasy, Inc. (1673), and Old AJ, Inc. f/k/a A. Jaffe, Inc. (4756).
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ORDERED that the Trustee, the Claims and Noticing Agent (Omni Agent Solutions),
and the Clerk of this Court are authorized to take all actions necessary or appropriate to
effectuate this Order; and it is further
ORDERED that this Court shall retain jurisdiction to hear and determine all matters
arising from or related to the implementation and/or interpretation of this Order.
Dated: New York, New York _______ __, 2019
_______________________________________ HONORABLE SEAN H. LANE UNITED STATES BANKRUPTCY JUDGE
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