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Fabrikant creditors sue lenders

By Susan Thea Posnock
October 10, 2007

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New York—The unsecured creditors of M. Fabrikant and Sons have filed a lawsuit against the institutions that funded the liquidating diamond company for at least $118 million, alleging fraudulent conduct by the lenders.

According to a lawsuit filed on Oct. 1 in the U.S. Bankruptcy Court for the Southern District of New York, the defendants knew money they were lending to M. Fabrikant and Sons and its domestic affiliate Fabrikant-Leer International was not being used for its interest, but being transferred to companies affiliated with the Fortgang family, which controlled the two companies.

"Because the money being transferred at a time when Fabrikant itself was insolvent, bankruptcy law allows these secured loans to be avoided, which compels the defendants to return to the estates the value of the collateral granted to secure those loans, an amount in excess of $80 million," court papers stated.

Furthermore, the creditors claim in the suit that Fabrikant's affiliates used some of the transferred money to pay down the debt they owed to some of the defendants. Creditors claim that those transfers, which exceeded $38 million, should be paid back to the estates as well.

The defendants named in the lawsuit are ABN Amro Bank NV, Antwerpse Diamantbank NV, Bank Leumi USA, Bank of America NA, HSBC Bank USA NA, Israel Discount Bank (IDB) of New York, J.P. Morgan Chase Bank NA and Sovereign Precious Metals LLC.

Court papers state that Charles Fortgang, chairman of the company at the time, and Matthew Fortgang, chief executive officer, permitted "massive transfers over $175 million from MFS (M. Fabrikant and Sons Inc.) to Fortgang affiliates" and were acting "in their own personal interests and not in the interests of MFS or FLI (Fabrikant-Leer International)."

The creditors claim these Fortgang affiliates—47 companies, including Alpha Diamond Co., Diamfab PVBA, Fabrikant HK Trading Ltd. and Fabrikant Trading India—used transfers to reduce their own debt to their lenders, namely, defendants ABN Amro, HSBC and IDB.

Fabrikant filed for Chapter 11 bankruptcy protection on Nov. 17, 2006. According to court papers, MFS was unable to pay its debts as they matured, or had unreasonably small capital for their business, by no later than January 2003. By no later than Jan. 13, 2006, FLI had also become insolvent.

"MFS dealt with its insolvency by moving money back and forth between it and Fortgang affiliates as necessary to clean up balance sheets of MFS and the Fortgang affiliates at the appropriate time," court papers state.

The lawsuit asks, rhetorically, where MFS got the money to make transfers, then notes that prior to Fabrikant's filing for Chapter 11, pre-petition banks loaned money to MFS—totaling $161.3 million—on a discretionary demand basis, although the company was insolvent.

Representatives from Bank of America and J.P. Morgan declined to comment on the lawsuit. At press time, the other banks had not responded to requests for comment.
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