M. Fabrikant's disclosure statement hearing adjourned to Friday; judge asks for more valuations

By Reshmi Basu

New York, Oct. 30 - M. Fabrikant & Sons, Inc.'s disclosure statement for its plan of liquidation needs hard valuation numbers before it can get the green light from the court, a federal judge said Tuesday.

The hearing has been adjourned until Friday.

Declining to approve the plan Tuesday, judge Stuart Bernstein criticized the document for failing to contain a number of elements necessary for creditors to evaluate the plan, such as the value of the estate, recovery rates, distribution percentages as well as information on claims filed against the company.

The plan, which is sponsored by the official committee of unsecured creditors and some of the company's current lenders, provides for the establishment of two liquidating trusts. The beneficiaries of the first trust will be current lenders, and proceeds from the second trust will be distributed to creditors.

In the one objection voiced Tuesday, counsel for the executor of the estate of Philip Hahn, the founder and former co-chairman of the company's board, decried the plan for missing critical pieces of information and furthermore noted that the trusts are not ready to be formed at the present time.

The Hahn estate is not only a creditor, but might also be named a defendant in a potential lawsuit on allegations of breach of fiduciary duty against former principals of the company.

The creditors committee is already suing eight banks for the return of $80 million in collateral for lending money to the company even though they were allegedly aware that the loans were being siphoned to non-debtor companies affiliated with the Fortgang family, which controlled Fabrikant, at a time when Fabrikant itself was insolvent.

In court Tuesday, Hahn estate attorney Arthur Steinberg of Kaye Scholer LLP said the current lenders had designed a plan that would allow them to be immunized from lawsuits while not revealing who they intend to sue until after they obtained protection from the plan.

Moreover, the proposed plan provides for creditors to release their individual claims against the current lenders with no explanation as to why this is appropriate, Steinberg argued.

And with no hard numbers, creditors' ability to decipher whether they are getting a fair shake is an impossible task, he contended.

In defense of the plan, the counsel for one of the plan proponents, the current lenders, noted the difficulty in pinning down valuation numbers because so much depends on litigation.

Noting the lack of information within the disclosure statement, judge Bernstein asked why there was such a rush to get the statement approved.

"This estate is burning cash," which makes time of the essence, the counsel for the lenders explained.

An amended version of the disclosure statement is expected to be filed by the end of Wednesday.

Fabrikant, a New York-based manufacturer and distributor of diamonds and gemstone jewelry, filed for Chapter 11 on Nov. 17, 2006. Its case number is 06-12737.

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