By and  on November 25, 2008

Attorneys for Fred Leighton termed new claims against the high-profile jeweler by its major creditor “pernicious,” and said they were likely prompted by an earlier amended complaint.

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 for the construction of a new Beverly Hills store that exceed $1 million.

Calling the new claims “pernicious,” Helen Chaitman, an attorney at Phillips Nizer, the law firm representing Fred Leighton, noted that Leighton filed an amended complaint seeking $500 million in compensatory and punitive damages from Merrill on Nov. 10. She said Merrill’s new motion was based on facts the creditor had known for four to five months and had probably been prompted by her client’s amended complaint. Chaitman said Leighton would answer each of Merrill’s allegations by a Dec. 4 deadline.

“The fact that there’s been a drop in global luxury retail sales can’t be blamed on us,” she added.

In the documents filed Friday, 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.

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. 12. Merrill Lynch Mortgage Capital Inc. is represented by Cadwalader, Wickersham & Taft.

Merrill loaned Esmerian about $180 million to buy the company, which was put into bankruptcy in April. Esmerian, a jewelry dealer, hired former Merrill Lynch broker Peter Bacanovic, who served a five-month jail term for lying to prosecutors in the Martha Stewart case, as president of Fred Leighton. Bacanovic has instituted several strategies to try to get the jeweler back on track.

Fred Leighton is known for providing red-carpet celebrities with its expensive estate pieces. In March, it 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 took Fred Leighton into bankruptcy.

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