By and  on March 4, 2008

NEW YORK — A New York Supreme Court hearing last week resembled a horse-trading session of sorts when a judge divvied up how to sell off millions of dollars of jewelry that Ralph Esmerian, a collector and owner of jeweler Fred Leighton, used as collateral for a loan that went sour.

The result was that neither Merrill Lynch Mortgage Capital Inc., which claims it is owed $185.3 million, nor the collector, who also is facing a legal challenge from Christie's Inc., got entirely what they wanted. The case is ongoing and does not involve Fred Leighton.

Merrill Lynch, under pressure from tightening credit markets and turmoil on Wall Street, claimed Esmerian and related parties defaulted on the loan and wanted to auction off the collection of rare jewels through an auction at Christie's.

Each side contended through expert witnesses that it could get the most value out of the collateral. As the day in court wore on, Justice Helen Freedman began singling out pieces on which the two sides couldn't agree on value and indicated that Esmerian would have three months to try to sell them.

Howard R. Hawkins Jr., the Cadwalader, Wickersham & Taft attorney representing Merrill Lynch, said the financial company could not risk a fallout in the high-end jewelry market.

"They are in no position to bond that kind of exposure," he said.

Brushing aside such protests, the judge stood quickly with raised hands and said over the lawyers' voices, "Listen, it's commercially reasonable. I'm just giving them the chance to sell those items."

Afterward, Freedman and the two sides decided on 10 pieces Esmerian would have the opportunity to sell.

Freedman said Esmerian could either sell the pieces over the next few months or Merrill could "put them in the next auction."

At the hearing, Rahul Kadakia, the head of Christie's jewelry department, gave the collection a value of $35 million, but said the market was at a high and an auction next month could bring in more.

"The market is as good as it's ever been," said Kadakia, citing a bump in diamond prices in recent weeks and the falling dollar, which helps deep-pocketed foreign investors stretch their millions.

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