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Messer v. Peykar International Co., Inc.

United States District Court, S.D. New York

April 10, 2014

GREGORY MESSER, as Chapter 7 Trustee of Fine Diamonds, LLC, Plaintiff,
PEYKAR INTERNATIONAL CO., INC., MITCH PEYKAR, AND MEHRAN PEYKAR, Defendants. In re: FINE DIAMONDS, LLC, Chapter 7, Debtor. Adversary Proceeding No. 09-1033 (REG), 09-10492(REG)

WILK AUSLANDER LLP, Eric J. Snyder, Esq., Jessica Taran, Esq., New York, NY, Attorneys for Plaintiff CHAPTER 7 TRUSTEE GREGORY MESSER.

MITCH PEYKAR, Flushing, NY, MEHRAN PEYKAR, Fresh Meadow, NY, Pro se Defendants.


ROBERT W. SWEET, District Judge.

Plaintiff Gregor Messer ("Plaintiff" or "Trustee"), the Chapter 7 Trustee of Fine Diamonds, LLC, the debtor ("Fine Diamonds" or "Debtor") moves for an order (i) adopting the findings of fact and conclusions of law (the "Proposed Findings") set forth in the Decision after Trial of the Honorable Judge Gerber, dated October 11, 2013, In re Fine Diamonds, LLC, 501 B.R. 159 (Bankr. S.D.N.Y. 2013) (the "Decision"), pursuant to 28 U.S.C. 157(c), Bankruptcy Rule 8011, Local Rule 9033-1 of the Unites States Bankruptcy Court for the Southern District of New York ("SDNY Rule 9033-1"), the District Court's Amended Standing Order of Reference re: Title 11, dated January 31, 2012 (Preska, C.J.) (the "Standing Order") and the order of the Honorable United States Bankruptcy Court Judge Robert E. Gerber, dated November 18, 2013; (ii) directing the Clerk of the Court to enter a money judgment in the amount of $37, 593, 930.34, plus pre-judgment interest at 9% from December 7, 2008 through the date of the judgment; (iii) dismissing the appeals of the Decision filed by defendants Mitch Peykar ("Mitch") and Mehran Peykar ("Mehran") (collectively, the "Peykars, " together with Peykar International Co., Inc. ("Peykar" or "Peykar International"), collectively, the "Defendants"); and (iv) for such other and further relief as the Court deems just and proper. Based on the reasoning below, Plaintiff's motions are granted.

Prior Proceedings

The non-core action is related to an involuntary chapter 7 bankruptcy petition against the Debtor initiated on February 4, 2009 by creditor Nedbank Ltd. ("Nedbank"). In re Fine Diamonds, 501 B.R. at 174. Nedbank is a bank that is owed more than $10 million by the Debtor. The same day, Nedbank, among other things, moved for the immediate appointment of an interim chapter 7 trustee, and filed the underlying adversary proceeding (the "Adversary Proceeding"), seeking to recover, on behalf of the Debtor, "over $36 million" of diamonds (the "Transferred Diamonds") allegedly converted or embezzled from the Debtor. Id. The Trustee was appointed under Section 303(g) of the Bankruptcy Code on February 6, 2009.

On July 24, 2009, the Trustee filed an Amended Complaint substituting himself as Plaintiff in the Adversary Proceeding. The Amended Complaint sought relief on four separate grounds: turnover, under Section 542 of the Bankruptcy Code; fraudulent transfer doctrine; conversion; and fraudulent misrepresentation. Id. at 176.

The trial on the Adversary Proceeding was held on March 17 and 18, 2011 (the "Trial"). On October 11, 2013, the Bankruptcy Court entered the Decision, a 43-page long opinion in which the Bankruptcy Court entered judgment in favor of the Trustee and against the Defendants, jointly and severally, in the amount of $37, 593, 930.34, plus pre-judgment interest at 9% from December 7, 2008 through the date of the judgment. In the Decision, the Bankruptcy Court concluded that it possessed the constitutional authority to enter final decisions only with respect to certain claims (the two fraudulent conveyance claims and the turnover claim), but did not have the requisite authority to enter a final decision regarding the conversion claim. Id. at 164 n.3. Rather than sever the claims, the Bankruptcy Court deferred entry of judgment on the claims with respect to which it has the constitutional power to enter final judgment in order to permit the District Court to: (i) entertain any objections to the Decision; (ii) make a final determination regarding findings of facts and conclusions of law regarding all of the claims; and (iii) enter a judgment against the Defendants. Id.

In an order ("Implementation Order I") entered by the Bankruptcy Court simultaneously with the Decision (Case No. 09-01033, ECF No. 109), the Bankruptcy Court gave the Defendants 28 days to interpose any objections to the Decision. The Defendants were served with copies of the Decision on or about October 16, 2013 ( see id., ECF No. 111), and the Defendants were required to interpose objections to the decision on or before November 14, 2013.

No objections were filed by any of the Defendants within that deadline in accordance with Bankruptcy Rule 9033 and 28 U.S.C. ยง 157. The Peykars did file notices of appeal of the Decision on October 23, 2013. ( Id. , ECF Nos. 112 and 114). On November 6, 2013, the Peykars filed the designations docked as "Designation of Contents and Statements of Issues" (the "Designations") ( Id. , ECF Nos. 116 and 117). However, none of the Defendants interposed any objections to the Decision.

The Bankruptcy Court then entered an order ("Implementation Order II") directing the Bankruptcy Court clerk to transfer the record to the District Court and to request that a case be opened to allow the District Court to take the necessary action to implement the Decision.

Plaintiff filed the instant motion on November 26, 2013. On November 27, 2013, the Peykars each filed a "Motion to Correct Error" in the instant action, requesting that Designations be considered as objections to the Proposed Findings. The matter was marked fully submitted on December 11, 2013.

Findings Of Fact In The Decision

The findings of fact made by the Bankruptcy Court after the Trial is set forth in detail in the Decision. Only the salient facts are set forth below.

The Debtor was a New York limited liability company owned by Lester Meents ("Lester") and Jeffrey Meents ("Jeffrey"). Doran Meents ("Doran"), Jeffrey's son, was the sole employee of the Debtor. Id. at 165. The Debtor sold finished diamonds to wholesalers and retail outlets in Manhattan. Id. Louis Meents, Jeffrey's father and Doran's grandfather, started Festdiam Diamond Cutting Works ("Festdiam"), a South African privately held company, in the early 1960s. Festdiam is owned by Jeffrey and Lester and supplied the Debtor with finished diamonds. Id.

Between 2003 and 2006, Doran's business with the Peykars was limited and involved traditional purchase and sale transactions, with credit extended. Id. at 166. At the end of 2006, Mehran asked if Doran would agree to consign diamonds to him "on memo, " as was often done in the diamond business. Id. Beginning in early 2007, Doran began providing diamonds to the Peykars on consignment. Id.

From approximately April 2007 continuing through the end of 2008, virtually all of the sales and distribution of the Debtor's diamonds flowed through Peykar, Mitch and Mehran. Peykar became the principal distributor and broker of diamonds for Fine Diamonds. Id. at 167. The Peykars would sell the diamonds to customers and remit payment back to the Debtor. Id.

The Debtor delivered numerous diamonds to Peykar in the period from April 1, 2007 through November 2008 reflected on spreadsheets maintained in the ordinary course of the Debtor's business. Id. Each of the spreadsheets reflected specific diamonds that Doran delivered to either Mitch or Mehran, along with the cumulative price for each batch that Peykar agreed to pay Fine Diamonds. Id. The spreadsheets contained line items for each stone, listing the weight (by carat), color, clarity, and other physical characteristics. In addition, there was a listing for the "Rappaport" price (which is a trade publication that lists the values of diamonds), along with a discount for the particular transaction and a price for each stone that had been agreed upon between Doran and one or both of the Peykars. Id.

Doran made contemporaneous handwritten notes of any payments he received from Peykar with respect to each batch of the Debtor's diamonds that had been delivered to Mitch or Mehran. Id. On the bottom right of most of the spreadsheets was a date indicating the date that the spreadsheet was prepared. The diamonds were delivered to Peykar International on that date or shortly thereafter. Id.

During the early part of 2008, the amount owed to Fine Diamonds by Peykar began to increase, eventually exceeding $37 million by the end of the summer. In re Fine Diamonds, 501 B.R. at 168. In September 2008, Doran noticed that the payments from Peykar International were slowing down. Doran expressed his concern on numerous occasions to Mitch and Mehran that the Peykars were holding a large amount of Fine Diamonds' property while the money was coming in at a much slower pace. Doran was told by Mitch and Mehran that the diamonds were being kept safely under their control, locked in safes and available at all times either in New York or Tel Aviv. Id.

Doran, Lester and Lester's daughter confronted Mehran about the diamonds on December 7, 2008 at the Tel Aviv Diamond Exchange, where Mehran's office was located. Id. at 171. When they did so, Mehran immediately told them that he was holding $47 million of diamonds. Id. Mehran then produced a few boxes, trays, and parcels of loose diamonds which he acknowledged belonged to Fine Diamonds, and which he said were being returned as credit for what was owed by the Peykars to Fine Diamonds. Id. Mehran also claimed that some diamonds had been given to a broker in the United States to sell to customers there. But Mehran could provide no name for the broker, nor any documentation for this alleged transfer. Id. Mehran reiterated that $6 million in diamonds had been shipped to Fine Diamonds in New York two days prior, but he could produce no documentation to support this either. Id. Mehran claimed that the remainder of Fine Diamonds' diamond stock was in sealed cachet boxes being held in a safe in the basement of the building. Id.

The following morning, the cachets were opened revealing that the cachets maintained by Mehran were empty, except for one box. In re Fine Diamonds, 501 B.R. at 172. In fact, 85 to 90% of the parcels (small envelopes which would normally contain one diamond each) were completely empty, and those parcels that did contain diamonds were immediately identifiable as diamonds that had been swapped out, because they did not correspond to the value of the diamond listing on the face of the box. ...

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