Chapter 7 debtor ‘grossly overpaid’ for huge diamond, court finds

October 14, 2016

diamonds-no-credit-istock-photoDiamonds may be a girl’s best friend, but for one bankrupt Texas firm a 6.32-carat jewel dubbed the Pink Diamond proved to be a financial disaster, as a Dallas bankruptcy judge found the company paid far more for the gem than it was worth.

The trustee for debtor Worldwide Diamond Ventures can recover $390,000 from Sharpshooter II Inc., the firm that sold the jewel to Worldwide for $600,000 in July 2010, U.S. Bankruptcy Judge Stacey G.C. Jernigan of the Northern District of Texas said, finding that the debtor did not receive “reasonably equivalent value” in the transaction.

The amount represents the difference between what Worldwide paid and the highest bid the diamond attracted, $210,000, at an auction Sotheby’s conducted in 2015, the judge said.

The jewel did not sell at that auction because the high bid did not meet the reserve price of $220,000, but the bid’s amount was the best evidence available of the diamond’s actual market value, according to the opinion.

Ponzi scheme

Worldwide solicited money from investors, claiming it would generate a profit by purchasing diamonds cheaply and reselling them at a profit, but the business was really a Ponzi scheme because it used money from new investors to pay off earlier investors, Judge Jernigan’s opinion said.

The company filed for Chapter 7 bankruptcy in 2013. The trustee for Worldwide’s Chapter 7 estate, Robert Milbank Jr., filed an adversary action against Sharpshooter, seeking to recover the amount Worldwide paid for the Pink Diamond beyond its actual value.

The sale amounted to a constructively fraudulent transfer under the Texas Uniform Fraudulent Transfer Act, Tex. Bus. & Com. Code § 24.006(a), the trustee alleged.

Section 24.006(a) states, “A transfer … is fraudulent … if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.”

Milbank moved for summary judgment, and Judge Jernigan granted the motion.

‘Breathtaking’

The judge had the opportunity to see the Pink Diamond for herself when it was brought to the Bankruptcy Court, according to the opinion. The judge said she was dazzled by the jewel, calling it “breathtaking” and “eye-popping.”

“For a bankruptcy judge, a day in court does not get much better than this,” she wrote.

But on the matter of the diamond’s value, she found that Worldwide clearly overpaid by a large margin.

Before Worldwide acquired it, the diamond had sold three times since 2007, for $218,000, $250,000 and $295,000, she said.

Sharpshooter used inflated appraisals to persuade Worldwide to pay the amount it did, the judge said.

Once it had the diamond, Worldwide was unable to resell for a profit it despite efforts that included attempting to auction it at a fashion show put on by NFL players’ wives during the 2011 Super Bowl. Eventually, Worldwide sold it back to one of its previous owners for $190,000, the opinion said.

“The Pink Diamond is beautiful. It is eye-popping. But it is not the Pink Panther,” Judge Jernigan said, referring to the famous fictional jewel at the center of the 1963 Peter Sellers comedy film of the same name.

“And,” she added, “there was no evidence that it has ever been worth anywhere close to $600,000.”

In re Worldwide Diamond Ventures LP, No. 13-35115; Milbank v. Sharpshooter II Inc., Adv. No. 15-03121, 2016 WL 5395832 (Bankr. N.D. Tex. Sept. 27, 2016).