Firestar Diamond, Inc. and Fantasy, Inc.

UNITED STATES BANKRUPTCY COURT 	NOT FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
Firestar Diamond, Inc., et al., 	Case No. 18-10509 (SHL)
Debtors. 	(Jointly Administered)
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MEMORANDUM OF DECISION AND ORDER
A P P E A R A N C E S:
JENNER & BLOCK LLP
Attorneys for the Chapter 11 Trustee, Richard Levin, Esq.
919 Third Avenue
New York, New York 10022
By: 	Marc B. Hankin, Esq.
Carl N. Wedoff, Esq.
353 North Clark Street
Chicago, Illinois 60654
By: 	Angela Allen, Esq.
SAUL EWING ARNSTEIN & LEHR LLP
Attorneys for Fantasy Diamond Corporation
1270 Avenue of the Americas, Suite 2005
New York, New York 10020
By: 	Stephen B. Ravin, Esq.
John D. Demmy, Esq.
SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court is the Chapter 11 Trustee’s motion for summary judgment (the
“Motion”) on his objection to filed Claim No. 54 of Fantasy Diamond Corp. (“FDC”). See ECF
No. 1189. The Trustee initially filed an objection to FDC’s Claim No. 54 before filing this
Motion. See ECF No. 1043. FDC opposes the Trustee’s Motion. See ECF No. 1211. The
parties submitted memoranda of law and separate Statements of Undisputed Material Facts. See
Trustee’s Memorandum of Law (ECF No. 1190); Trustee’s Statement of Undisputed Material
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Facts (ECF No. 1191); FDC’s Opposition to Trustee’s Motion (ECF No. 1211); FDC’s Response
to Trustee’s Statement of Undisputed Facts (ECF No. 1212). After hearing argument on
November 18, 2019, the Court took this matter under advisement. For reasons explained below,
the Court denies the Trustee’s Motion.1
BACKGROUND
In late January 2018, Punjab National Bank (“PNB”) filed a complaint against Nirav
Modi and several associated entities, alleging “the largest bank fraud in Indian history” against
PNB and other banks. Report of John J. Carney, Examiner at 4 (ECF No. 394) (the “Examiner’s
Report”). Approximately one month later, three U.S. corporations indirectly owned by Nirav
Modi filed for Chapter 11 protection in the Southern District of New York, Firestar Diamond,
Inc. (“FDI”), Fantasy, Inc. (“FI”) and A. Jaffe, Inc. (“A. Jaffe,” and together with FDI and FI, the
“Debtors”). See ECF No. 1. Amidst a tumultuous, failed sale process of the Debtors’ assets and
the resignation of the Debtors’ CEO Mihir Bhansali, the Court ordered the appointment of
Richard Levin, Esq. as the Chapter 11 Trustee in mid-June 2018. See ECF No. 227.
Years before the bankruptcy was filed, debtor FDI and FDC entered into a License
Agreement. See Trustee’s Statement of Undisputed Material Facts ¶ 1 (ECF No. 1191). The
License Agreement granted FDI a limited exclusive right to use the various “Endless Diamond”
trademarks referenced in Schedule 1(b) of the License Agreement. See License Agreement, Ex.
B, Response of Fantasy Diamond Corporation (ECF No. 1086). The License Agreement’s
purpose was to provide for FDI “to take over FDC’s business operations and to continue to
exploit the FDC IP.” Decl. of Joseph H. Wein ¶ 13, Ex. A (ECF No. 1211) (the “Wein
1 	This decision memorializes and expands upon the Court’s observations at the oral argument on the Motion.
See Hr. Tr. 117:12–122:13, Nov. 18, 2019 (ECF No. 1361).
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Declaration”). FDC considered its relationship with Costco to be its “jewel,” id. ¶ 17, a
relationship of “incredible value” that FDC transferred to FDI. Id. ¶ 20.
After this bankruptcy was filed but before the Trustee was appointed, FDC filed a motion
to compel rejection of the License Agreement. See ECF No. 179 (the “Rejection Motion”). In
its Rejection Motion, FDC cited an ongoing threat to the value of its intellectual property. Id. ¶
22. The hearing on FDC’s motion was delayed until after the Trustee’s appointment.
Ultimately, the Court signed an order that was agreed upon by FDC and the Trustee. The order
granted FDC’s motion to compel rejection of the License Agreement under Section 365(a) of the
Bankruptcy Code; the order also terminated the automatic stay under Section 362(a) to allow
FDC to provide written notice of termination of the License Agreement (“Rejection Order”). See
¶¶ 2–3 (ECF No. 265). Under the Rejection Order, the Debtors and FDC reserved and retained
“any and all claims, rights, remedies, and defenses whatsoever that they may have under the
License Agreement and/or applicable law.” Id. ¶ 5. In late 2018, FDC filed a proof of claim
(Firestar Claim No. 54) seeking $2,800,000 from the FDI estate stemming from “unpaid
royalties” and “breach of contract” arising out of the License Agreement. See Ex. 1 (ECF No
1043). FDC’s claim also asserts that $40,582.00 of the claim is entitled to administrative
expense priority under Section 503(b)(9) of the Bankruptcy Code.
The Trustee objected to FDC’s claim, arguing it should be reduced from $2.8 million to
$40,582.00 and should be reclassified as a general unsecured pre-petition claim. See Chapter 11
Trustee's Objection to Filed Claim of Fantasy Diamond Corporation ¶¶ 15–17 (ECF No. 1043).
The Trustee subsequently moved for summary judgment on the claim, see ECF No. 1189, raising
the following three grounds for disallowance: (1) FDC abandoned the License Agreement; (2)
even if FDC did not abandon the License Agreement, the Rejection Order terminated it; (3)
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under New York law, FDC is not entitled to damages for lost future royalties or any damages for
lost future royalties are limited to the period before FDI could have terminated the License
Agreement. See id. ¶ 3.
DISCUSSION
Summary judgment is appropriate “if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter
of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Fed. R. Civ. P. 56(a) (made
applicable to the adversary proceeding by Fed. R. Bankr. P. 7056). A material fact is one that
“might affect the outcome of the suit under governing law.” McCarthy v. Dun & Bradstreet
Corp., 482 F.3d 184, 202 (2d Cir. 2007) (citations and internal quotation marks omitted). A
dispute about a material fact is “genuine . . . if the evidence is such that a reasonable jury could
return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986) (internal quotation marks omitted).
The moving party bears the burden of demonstrating the absence of any genuine issue of
material fact, and all inferences to be drawn from the underlying facts must be viewed in the
light most favorable to the party opposing the motion. See Anderson, 477 U.S. at 255; Ames
Dep't Stores, Inc. v. Wertheim Schroder & Co. (In re Ames Dep't Stores, Inc.), 161 B.R. 87, 89
(Bankr. S.D.N.Y. 1993). Once the moving party meets this initial burden, the non-moving party
must go beyond the pleadings and, by its own evidence, demonstrate that there is a genuine issue
of material fact for trial. See Celotex, 477 U.S. at 324; Matsuhita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 586–87 (1986) (after the moving party has met its burden under Fed.
R. Civ. P. 56(c), opposing party “must do more than simply show that there is some
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metaphysical doubt as to the material facts”). The non-movant must put forth “significant
probative evidence” showing a genuine dispute as to a material fact exists. Anderson, 477 U.S.
at 249. If the non-moving party fails to make such a showing, then the moving party is “entitled
to a judgment as a matter of law.” Celotex, 477 U.S. at 322–23; Fed. R. Civ. P. 56(e). In sum, if
the court determines that “the record taken as a whole could not lead a rational trier of fact to
find for the nonmoving party, there is no ‘genuine issue for trial.’” Matsuhita, 475 U.S. at 587
(quoting First Nat'l Bank of Az. v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968)); see also Weg
v. Macchiarola, 654 F. Supp. 1189, 1191–92 (S.D.N.Y. 1987).
I. 	Abandonment
Abandonment of a contract by mutual consent is considered effective to discharge its
obligations. Whether a contract has been abandoned is a question of fact. See Matter of
Rothko's Est., 372 N.E.2d 291, 299 (N.Y. 1977); Graham v. James, 144 F.3d 229, 238 (2d Cir.
1998); Cauff, Lippman & Co. v. Apogee Fin. Grp., 807 F. Supp. 1007, 1021 (S.D.N.Y. 1992).
The party asserting an abandonment defense has the burden of proving it, and abandonment will
not be presumed. See James, 144 F.3d at 238. Intent to abandon, however, “need not be
manifested expressly.” Jones v. Hirschfeld, 348 F.Supp.2d 50, 59 (S.D.N.Y. 2004). Instead, it
can be “inferred from the attendant circumstances and conduct of the parties.” Armour & Co. v.
Celic, 294 F.2d 432, 435 (2d Cir. 1961). Courts will impute such a mutual intent to abandon
even where only one party acts in an inconsistent manner and the other party merely acquiesces.
See C3 Media & Mktg. Grp. v. Firstgate Internet, Inc., 419 F. Supp. 2d 419, 433 (S.D.N.Y.
2005). But where conduct alone is the basis for a finding of abandonment, “the acts of the
parties must be positive, unequivocal and inconsistent with an intent to be further bound by the
contract.” Celic, 294 F.2d at 436. That one party has breached the contract, however, is alone
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insufficient to establish abandonment. See Carver v. Apple Rubber Prods. Corp., 558 N.Y.S.2d
379, 380 (N.Y. App. Div. 1990).
The Trustee argues that FDC engaged in at least two “positive and unequivocal” acts that
are “inconsistent with an intent to be further bound by” the License Agreement. First, the
Trustee points to FDC’s motion seeking to compel rejection of the License Agreement and to
modify the automatic stay to permit FDI to terminate. The Trustee contends that the motion
demonstrates that FDC was foregoing FDI’s continued performance under the License
Agreement. See ¶¶ 30–32 (ECF No. 1190). In the Trustee’s view, the negotiation to repatriate
the IP allowed both parties to achieve a resolution and move on with their lives:
[The Trustee] agreed on a stipulated rejection order, rather than litigating this
matter, which approved the rejection, it gave stay relief as FDC had requested, to
permit termination, and said, except as provided in the rejection letter, the parties'
rights under the licensing agreement were preserved.
Hr. Tr. 92:4–9, Nov. 18, 2019 (comments of Trustee’s Counsel).
Second, the Trustee argues that the rejection letter, dated June 26, 2018 (the “Rejection
Letter”), manifests a clear intent of the Trustee to no longer perform under the License
Agreement. Under the Rejection Letter, FDC and FDI agreed to grant FDC a right to sell
merchandise to non-FDC customers, which was a right previously reserved only for FDI. See
Rejection Letter, Ex. B (ECF No. 265). FDC also consented to the Trustee having “as much
time as is needed” to sell off the remaining merchandise, a right that could only be exercised
upon termination. See id. These provisions in the Rejection Letter, the Trustee argues, mean
that the parties acted in a manner “inconsistent” with a mutual intent to be bound further by the
contract. See Trustee’s Statement of Undisputed Material Facts ¶ 40; see also Hr. Tr. 31:3–8,
June 27, 2018 (ECF No. 286).
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While there is some support in the record for the Trustee’s position, the Court ultimately
concludes that the Trustee has not met the high burden to establish abandonment. In short,
reasonable debate can exist as to whether the facts here constitute an abandonment by FDC of
the License Agreement or any claim for damages from rejection. As the Trustee concedes, the
Rejection Motion only sought permission to terminate and rejection itself is a breach, not a
termination. See In re Old Carco LLC, 406 B.R. 180, 212 (Bankr. S.D.N.Y. 2009); 2 Norton
Bankr. L. & Pract. 3d § 46:23 (“Rejection of a contract or unexpired lease, while constituting a
breach of contract, does not terminate the contract or lease”); see also Hr. Tr. 92:3–9, Nov. 18,
2019; Trustee’s Reply at 16 (ECF No. 1229) (“FDC asserts that its Rejection Motion merely
sought permission to terminate and that rejection is a breach, not a termination. While both
points are true. . . . ”). And while FDC was granted the ability to terminate the License
Agreement, it has not done so to date. See, e.g., Response of Fantasy Diamond Corporation ¶
73. Moreover, the Rejection Order explicitly provided that both parties would “reserve and
retain any and all claims, rights, remedies, and defenses whatsoever that they may have under the
License Agreement and/or applicable law,” a provision which arguably preserves FDC’s rights
to damages under the License Agreement. See ¶ 5 (ECF No. 265).
The Court reaches a similar conclusion about the Rejection Letter. Its changes to the
parties’ rights do not categorically establish an intent to abandon. 	Indeed, FDI and FDC have
previously made modifications to the License Agreement while continuing their contractual
relationship. See First Amendment to License Agreement, Ex. A (ECF No. 1191). Reading the
facts in the light most favorable to the non-moving party FDC, therefore, the Court concludes
summary judgment is inappropriate as to abandonment.
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II. 	Termination
The Trustee also argues that the parties terminated the License Agreement. Specifically,
the Trustee argues that the Rejection Order, ECF No. 265, actually or impliedly provided for
termination of the Agreement. See Ex. B (ECF No. 1043). In the alternative, the Trustee argues
that the letter dated March 22, 2019, addressed to John D. Demmy, Esq., attorney for FDC,
validly terminated the License Agreement. But once again reading the facts in a light most
favorable to FDI, the Court finds that summary judgment is not appropriate. As already
mentioned above, it is well-settled that rejection of an executory contract is not termination. And
the language of the Rejection Order does not provide for termination of the License Agreement;
it instead merely lifts the stay to permit FDC to issue a written notice of termination at its
discretion. See Rejection Order ¶¶ 2–4 (ECF No. 265). FDC has not exercised its right to
terminate, despite receiving permission to do so.
The Trustee’s reliance on its letter of termination is also problematic. While the Trustee
is correct that the License Agreement provides termination rights to each party under certain
circumstances, that is not the end of the story. FDC maintains that the Debtor was already in
material breach of the License Agreement before the letter of termination was issued in
2019. See Response ¶¶ 75–80; Hr. Tr. 104:16–19, Nov. 18, 2019 (“The Debtor's fraud that they
were involved in and the bankruptcy are breaches of the contract because they prevented the
Debtor from doing what it was supposed to do to meet the $250,000 threshold.”). With the
Debtor purportedly in breach, therefore, FDC maintains that the Trustee cannot exercise the right
to terminate that is contained in the License Agreement. See Nadeau v. Equity Residential
Properties Mgmt. Corp., 251 F. Supp. 3d 637, 641 (S.D.N.Y. 2017) (“[W]hen a party to a
contract materially breaches that contract, it cannot then enforce that contract against a non-
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breaching party.”). The Court is well aware of the serious allegations of fraud by Debtors in
these cases. See generally Examiner’s Report. But the Court does not have specific evidence
before it to find that the Debtor was in material breach of this particular License
Agreement. Thus, the question about whether Debtor was in material breach—such as to
preclude it from exercising its right to terminate—remains an unresolved issue that precludes
summary judgment.2 Moreover, even if the License Agreement was terminated, such
termination would not necessarily extinguish damages arising from the termination; it would
simply affect the scope of those damages, an issue we turn to next.
III. 	Damages
A party seeking damages bears the burden of proof of establishing that “any claimed
damages were caused by defendant's breach to a reasonable degree of certainty.” Wechsler v.
Hunt Health Sys., Ltd., 330 F. Supp. 2d 383, 425 (S.D.N.Y. 2004) (quoting Xpedior Creditor Tr.
v. Credit Suisse First Bos. (USA) Inc., 341 F.Supp.2d 258, 271 (S.D.N.Y. 2004)). Under New
York law, breach of contract damages may fall into any one of three categories: expectation,
reliance, and restitution. Id. at 424–25 (citing Xpedior Creditor Tr., 341 F. Supp. 2d at 270–72
(citation omitted)). Both parties agree that the measure of contract damages in this case under
New York law is expectation damages. See Response of Fantasy Diamond Corporation ¶ 81;
Trustee’s Memorandum ¶ 45; Hr. Tr. 93:22–24, Nov. 18, 2019. Expectation damages “offer the
broadest remedy” and constitute “‘the amount necessary to put plaintiff in as good a position as
if defendant had fulfilled the contract.’” Wechsler, 330 F. Supp.2d at 425 (quoting Saxton
Commc'n Grp., Ltd. v. Valassis Inserts, Inc., 1995 WL 679256, at *2 (S.D.N.Y. Nov. 15, 1995)
(citing Bausch & Lomb, Inc. v. Bressler, 977 F.2d 720, 728 (2d Cir. 1992)).
2 	The Court is aware that certain rights under the License Agreement survive termination. But that issue is
distinct from whether the License Agreement itself could be terminated under the circumstances here.
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The Trustee argues that, even if the License Agreement remained enforceable, it does not
contain any basis to hold Firestar liable for damages. See Trustee’s Memorandum ¶¶ 45–51.
The Trustee contends that even if the License Agreement required FDI to continue operating,
FDC cannot recover damages beyond the first period in which Firestar could have exercised its
unilateral right to terminate. Id. ¶ 52–54. But as discussed above, FDC disputes that the Debtor
had, as a breaching party, a unilateral right to terminate. Id. ¶¶ 96–99. Moreover, if such
termination were effective, it would not necessarily extinguish damages. The parties also have
not provided an appropriate record upon which the Court could determine damages, even if it
reached that question. Given all these issues, summary judgment is not appropriate on the issue
of damages.
While the Court does not decide the issue of damages today, the Court does have serious
reservations on the existing record about FDC’s claim for seven years of damages for an average
of $450,000 per year, a figure that FDC contends is based on its “reasonable expectations” at the
time of contracting. See Hr. Tr. 102:6–13, Nov. 18, 2019; Response of Fantasy Diamond
Corporation ¶ 24; Wein Decl. ¶ 25. It is hard to square the amount and duration of FDC’s claim
with two aspects of the record. First, there is nothing in the License Agreement that guarantees
any minimum level of profits to FDC. Thus, this situation is markedly different than the case
relied upon by FDC, Honeywell Intern. Inc. v. Northshore Power Sys., LLC, 936 N.Y.S.2d 59
(N.Y. Sup. Ct. 2011), aff'd 946 N.Y.S.2d 474 (N.Y. App. Div. 1st Dept. 2012), where the license
agreement provided for a “minimum guaranteed royalty payment” from licensee to licensor for
the term. Second, the License Agreement gives the parties the right to terminate the agreement if
the amount of royalties falls below a $250,000 threshold. See Section 12(d), License Agreement,
Ex. B (ECF No. 1086). This provision suggests that the parties contemplated termination of the
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License Agreement without penalty if the License Agreement was no longer beneficial and
profitable for the parties. In fact, the royalties here did fall below $250,000 in 2018, which is
exactly what prompted the Trustee to send its termination letter. See Levin Decl. ¶ 11, Ex. B
(ECF No. 1191).
CONCLUSION
For the foregoing reasons, the Court denies the Trustee’s Motion. The parties shall
confer about the best way forward in this matter in light of the Court’s decision and shall report
back to the Court by joint letter in 30 days.
IT IS SO ORDERED.
Dated: New York, New York
April 17, 2020
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
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