The legal battle between Ralph Esmerian, owner of Fred Leighton, and Merrill Lynch is heating up, with everything from Esmerian’s home to potentially the Leighton business on the line.

This story first appeared in the March 13, 2008 issue of WWD. Subscribe Today.

Esmerian has been tangling with Merrill Lynch Mortgage Capital in New York Supreme Court since January over the $183.3 million the financial giant said it is owed on two loans that went sour. Esmerian has since paid down $10 million of the loan.

Last month, Justice Helen Freedman said Merrill Lynch could auction off 77 pieces of jewelry it is holding as collateral and has in its possession, while giving Esmerian three months to sell off 10 other pieces through private sales.

In a recently filed affidavit, Esmerian said he could get substantially more on three pieces Merrill Lynch plans to auction through Christie’s.

“I…beg the court to allow me to try to sell these three pieces,” he said.

In one instance, Esmerian said he had a buyer who might pay $10 million for a piece that Christie’s values at $4 million to $6 million, though auction prices are never truly known beforehand.

“This one item, recklessly sold at the auction, could mean the loss of my home because I have personally guaranteed the debt,” said Esmerian in court papers.

Since the 87 pieces that are to be sold or auctioned off are only a portion of the collateral, there could be much more to come in the case.

Merrill Lynch, for one, seems to be antsy to rid itself of the liability.

Last month in court, 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.

The loans are secured by more than 4,000 pieces of jewelry valued at over $300 million as well as the Leighton business. It is not known if Merrill Lynch has made any attempt to find a buyer for Leighton.

Hawkins declined to comment on the case.

According to court papers, Leighton’s profits in 2003 jumped 65.2 percent to $7.6 million as sales rose 38.7 percent to $38.6 million. Sales of the Leighton business three years after the Esmerian acquisition were projected to rise to $113 million, but could be as low as $44.9 million in a “stressed scenario.”

A handwritten Merrill Lynch memo also describes Leighton as a “motivated seller” in his 70s who was going to use some of his proceeds to pay off a tax liability.

The case shines a light on not only Esmerian and the Leighton business, but the rough and tumble game of borrowing money from Wall Street.

In 2005 and 2006, Merrill Lynch lent Esmerian $100 million to buy Leighton, extended him $27 million for a line of credit for the business and also lent him $57 million against his family’s special collection of fine jewelry.

In September, Esmerian asked for a two-week extension on an interest payment and Merrill Lynch declared that the loan was in default. Esmerian claims the financial giant, which took a heavy hit in the fallout of the subprime mortgage market, acted in bad faith.