Bank of India, Union Bank claims against Nirav Modi’s American firms disallowed

The Chapter 11 Trustee for Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc — Nirav Modi’s three American entities that had filed for bankruptcy protection in the US after the massive PNB fraud — recently filed objections to the claims of Union Bank of India (UK) and Bank of India (London branch).

Seeking to disallow the claims — $3.2 million filed by the former and about $0.4 million by the latter — the court-appointed Chapter 11 Trustee pointed out that the Indian banks failed to show they are eligible creditors of Firestar Diamond.

“The key problem for Union Bank of India and Bank of India is that while they may have engaged in credit transactions with Modi-controlled entities, the banks making the claims are not direct creditors of the US companies in Chapter 11,” said Seth R Freeman, CIRA, CTP, a bankruptcy expert and Senior Managing Director of GlassRatner Advisory & Capital Group, LLC in San Francisco.

While the Indian banks may have claims against other companies within the Firestar corporate family, they cannot assert their claims against Firestar Diamond in particular (which is under bankruptcy proceedings), according to the Chapter 11 Trustee, Richard Levin, an author of the 1978 US Bankruptcy Code, and one of the world’s foremost bankruptcy lawyers.

As it appears, the global web of shadow entities domiciled in Dubai, Belgium and other countries that Nirav Modi used for perpetrating the $4-billion fraud could make it a Herculean task for PNB and other Indian banks to recover anything from Chapter 11 proceedings in the US.

Massive fraud

The seven-year scam — from 2011 to 2018 — involved the fraudulent procurement of Letters of Undertaking (LoUs). LoUs allow an importer to obtain short-term credit from its bank in India, secured by invoices for the to-be imported goods. The multi-billion dollar fraud at PNB, that came to light last year, revealed that Nirav Modi artificially inflated the import volume of India-based companies — Diamonds R Us, Solar Export, and Stellar Diamond — with sham transactions to obtain more LoU funding.

The US bankruptcy court-appointed examiner last year had also confirmed the numerous shadow entities created to launder funds obtained fraudulently from PNB and other banks.

Ever since the Chapter 11 bankruptcy proceedings of Nirav Modi’s US entities began last year, the million-dollar question has been whether Indian banks would be able to proceed against the assets of these companies. With the claims of Bank of India and Union Bank being disallowed, it appears that domestic lenders are in for a rough ride.

Not owed by Firestar

On April 26, 2018, Union Bank had filed a proof of claim for $3,168,074, against Firestar Diamond Inc and Old AJ (A Jaffe, Inc). Its claim is based on amounts supposedly owed by Firestar Diamond to another company within the group — Firestar Diamond BVBA, Belgium (currently under insolvency proceedings in Belgium).

BVBA’s involvement in the massive bank fraud was extensive. But while various documents suggest a basis for a claim by Union Bank against BVBA, there is nothing that indicates the bank’s claim against Firestar Diamond, which is under Chapter 11.

Hence, the Chapter 11 Trustee had filed the objection to the bank’s claim under section 502 of the Bankruptcy Code, and Rule 3007 of the Federal Rules of Bankruptcy Procedure, seeking to disallow the claim in full.

Bank of India (London), too, had failed to show it is owed anything by Firestar Diamond — documents and agreements at best suggested a claim against Firestar Diamond FZE, Dubai.

In view of the Trustee’s objection, the US Bankruptcy court has disallowed both the claims.

Cross-border expertise

“The Nirav Modi fraud is extraordinarily complex and was enabled by corrupt bank officers that allowed it to become large and exist over an extended period of time, giving it the appearance of legitimacy. It is almost a form of what we call “affinity fraud” — the lenders with these related party transactions failed to perform independent due diligence and instead relied upon false confidence in PNB’s relationship and credit management with Modi,” says Freeman.

He adds that it may be instructive to observe the intricacies of the Firestar Diamond US Chapter 11 process. “It involves Indian creditors that lend to Indian importers and exporters with foreign subsidiaries that may end up in US bankruptcy proceedings. Developing cross-border expertise will become increasingly important.”