The strained relationship between high-profile jeweler Fred Leighton and its major creditor, Merrill Lynch, has reached new levels of friction.
Merrill Lynch Mortgage Capital Inc. filed a motion in U.S. Bankruptcy Court, Southern District, on Friday citing the possibility of a Chapter 7 liquidation by the famed jeweler. Merrill said the firm could run out of operating cash by the end of the year and called for its owner, Ralph Esmerian, to be replaced by a “disinterested Chapter 11 trustee.”
In the court papers, obtained by WWD, Merrill charged Esmerian with concealing inventory records, failure to take the necessary steps to improve the business and pay down debt, as well as cost overruns at the construction of a new Beverly Hills store that exceed $1 million.
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Merrill said Esmerian “used the debtor’s estate as his personal candy store.” The papers also raised questions about what happened to a “special collection” of jewelry items that were collateral.
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According to a source familiar with the case, Merrill conducted an investigation into the inventory, and then decided to go public for the first time with allegations about missing inventory by filing the motion.
“Esmerian systematically sold significant portions of Merrill Lynch’s collateral and diverted the proceeds for purposes other than the repayment of Merrill Lynch,” the court papers said.
If Leighton runs out of operating funds, the company could be forced to sell. A hearing has been set for Dec. 2. Merrill Lynch Mortgage Capital Inc. is represented by Cadwalader, Wickersham & Taft. Esmerian is represented by Philip Nizer. Esmerian’s attorneys have until Friday to file an objection.
Merrill loaned Esmerian about $180 million to buy the company, which was put into bankruptcy last April. Esmerian, an art dealer, hired Peter Bacanovic, who did a five-month jail term for insider trading in the Martha Stewart case, as president of Fred Leighton. Bacanovic has instituted several strategies to try to grow and get the jeweler back on track. Fred Leighton is known for providing red carpet celebrities with its expensive estate pieces. Last March, sought repayment of its loans to Esmerian and a Christie’s auction of the most prized pieces was set. The auction was abruptly halted when Esmerian threw Fred Leighton into bankruptcy.