Regal Jewelry and Gift Shop LLC v. Wildenstein

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
---------------------------------------------------------------x
In re: 	:
: 	Chapter 11
JOCELYN WILDENSTEIN, 	:
: 	Case No. 18-10766 (MEW)
Debtor. 	:
---------------------------------------------------------------x
REGAL JEWELRY AND GIFT SHOP, LLC, 	:
:
Plaintiff, 	:
: 	Adv. Proc. No. 18-01615 (MEW)
- against - 	:
:
JOCELYN WILDENSTEIN, 	:
:
Defendant. 	:
---------------------------------------------------------------x
DECISION AFTER TRIAL
A P P E A R A N C E S:
LAZARUS & LAZARUS P.C.
New York, New York
By: Harlan Lazarus, Esq.
Attorneys for Regal Jewelry and Gift Shop, LLC
REED SMITH LLP
New York, New York
By: Michael J. Venditto
Attorneys for Jocelyn Wildenstein
HONORABLE MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE
Plaintiff Regal Jewelry and Gift Shop, LLP (“Regal”) seeks, among other things, an
order and judgment declaring that a debt owed by debtor Jocelyn Wildenstein (“Wildenstein”)
in the amount of $268,000 should be excepted from discharge pursuant to 11 U.S.C. § 523.
Regal also seeks pre-judgment and post-judgment interest, reasonable attorneys’ fees, costs and
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expenses. For the reasons set forth below, the Court finds in favor of Regal and will enter
judgment accordingly.
Jurisdiction and Power to Enter a Final Judgment
The parties have agreed that this Court has jurisdiction over this matter under 28 U.S.C.
§§ 157 and 1334 and that this adversary proceeding is a “core” proceeding pursuant to 28 U.S.C.
§ 157(b)(2)(I). The parties have also consented to the entry of final orders or judgment by this
Court. In light of the parties’ consent this Court has the power to enter a final decision. See 28
U.S.C. § 157(d); Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1942, 1949 (2015).
Stipulated Facts
Many of the relevant facts are not disputed and are the subject of stipulations set forth in
the Amended Joint Pre-Trial Order [ECF No. 29].
Wildenstein previously resided in an apartment at Trump World Tower in New York. At
the times relevant to this proceeding she resided with an individual named Lloyd Klein
(“Klein”). On or about November 14, 2017, Klein delivered to Regal four post-dated checks that
were signed by Wildenstein and drawn on the account of an entity named JW51AE, LLC. The
checks were issued to evidence Wildenstein’s obligation to pay Regal for certain jewelry that she
had agreed to purchase. Each check was in the amount of $62,500, and the four checks were
dated January 7, 2018, February 7, 2018, March 7, 2018 and April 7, 2018, respectively.
Wildenstein admits that she knew, on the day the checks were issued, that the JW51AE, LLC
account did not then hold sufficient funds to cover the checks.
The parties also agree that beginning on November 16, 2017 and continuing thereafter,
Klein communicated with representatives of a pawn broker named BLCE, LLC d/b/a New York
Loan Company (“BLCE”) to obtain loans that were to be secured by the jewelry that
Wildenstein had agreed to purchase with the post-dated checks. Klein pledged the jewelry to
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BLCE as collateral for loans in the total amount of $70,000.00. The loan monies were paid from
BLCE to Wildenstein and to the account of JW51AE, LLC. Wildenstein has stipulated that she
knew about the pawn transactions and the loans at some time in 2017, though she did not
stipulate as to whether she knew of the transactions before Klein arranged them.
The JW51AE, LLC check dated January 7, 2018 was not paid by Citibank when it was
presented for payment. Regal did not negotiate any of the checks after January 7, 2018.
However, between January 2018 and April 2018, Regal tried to obtain payment for the jewelry
or the return of the jewelry from Wildenstein and Klein and, eventually, from Wildenstein’s
counsel. The jewelry was never returned to Regal, and no payment was made to Regal.
Throughout the period from November 22, 2017 through at least June 28, 2018, the
jewelry was in BLCE’s possession, custody and control. The parties have stipulated that
Wildenstein and Klein could not and did not redeem the jewelry from BLCE, though they did not
explain why Wildenstein and Klein “could not” do so (except possibly due to lack of funds).
BLCE eventually sold the jewelry for $100,000.00 to DBS Diamonds Inc. and remitted
$5,530.00 to Klein for the surplus monies from that sale, which sum has not been paid to Regal.
DBS Diamonds Inc. then sold the jewelry for $126,000.00 to Bijan & Co. Inc.
Wildenstein admits that she is indebted to Regal in the amount of $268,000.00. The only
issue is whether the debt is subject to discharge in Wildenstein’s bankruptcy case.
Findings of Fact
The Court held a trial of this matter on January 28, 2021. Jack Zebede, the sole owner
and proprietor of Regal, testified at the trial and was subject to cross-examination. The parties
also submitted excerpts from the deposition testimony of Wildenstein and Klein, and twenty
exhibits were accepted into evidence. I have considered the testimony and exhibits and make the
following findings of fact to supplement the stipulated facts set forth above.
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Wildenstein and Klein are not married but they lived together for 15 years or more and
once were engaged. They lived together at the times relevant to this dispute, and they shared
homes in Miami and in New York.
Regal rented retail space on the ground level of the Pierre Hotel. Zebede met
Wildenstein and Klein when they stopped to look at jewelry through a display window and
Zebede invited them in. They spoke for a while and Zebede exchanged cards with Klein, but
Wildenstein did not purchase any items. Wildenstein and Klein visited the Regal shop on
another occasion, at which time Wildenstein admired a five-piece emerald and diamond suite.
However, Wildenstein did not purchase the items at that time.
Zebede became friendly with Klein and they met from time to time for lunch, coffee or
drinks. In the latter part of 2017, Wildenstein and Klein made an appointment to visit with
Zebede at the Regal shop for the purpose of looking again at the five-piece emerald and diamond
suite. Zebede quoted a price of $300,000. Wildenstein and Klein did not purchase the items, but
instead offered to assist Zebede in selling them. They told Zebede that Wildenstein had
connections with Sotheby’s and Christie’s and that if Zebede would bring the items to
Wildenstein’s apartment she would arrange to have the items appraised for a possible auction
sale. They also suggested that the items might be sold for higher prices if Wildenstein’s name
were to be associated with them at auction. Wildenstein and Klein proposed that if the items
sold for $300,000 then Zebede would get all the proceeds, but that if a higher price were
obtained then the excess proceeds would be split, with one-third going to Zebede, one-third to
Wildenstein and one-third to Klein.
Zebede took the emerald and diamond suite to Wildenstein’s apartment in September
2017, but the appraisers from Sotheby’s and Christie’s did not suggest a sufficiently high price to
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make Zebede interested in putting the items up for auction. A few weeks later, however, Klein
called Zebede and asked if he would agree to allow Wildenstein to wear the emerald and
diamond suite to an impressionist art auction to be held at Sotheby’s. Zebede agreed, and he
delivered the items to Klein along with a receipt that noted a value of $250,000 and included the
notation “Suite for exhibition.” (PX 3.) Klein signed the receipt, and Wildenstein wore the
items to the auction. The record is not perfectly clear as to the date of the Sotheby’s event or the
date when the items were delivered by Zebede, but the receipt “for exhibition” is dated
November 14, 2017 and Zebede testified that he delivered the items on that date, and the Court
finds that he did so.
Klein called Zebede one or two days after the Sotheby’s event and told Zebede that
Wildenstein loved the jewelry and did not want to return it. Klein told Zebede that Wildenstein
was in the process of selling her apartment, and proposed to pay for the items by delivering a
series of post-dated checks, the first of which would be payable in January 2018. Zebede balked
and asked for immediate payment, but Klein told him that a contract to sell Wildenstein’s
apartment had been signed and that the sale would bring in $11 million or more, and that the
offer to pay with post-dated checks was a “take it or leave it” proposition because it was more
convenient for Wildenstein and Klein to make payment in this way.
Zebede relented, and Klein brought the checks to the Regal shop. Copies of the checks
were admitted into evidence as PX 4. When Klein delivered the checks he admired a diamond
chain, and Zebede agreed to sell the chain as well. Zebede added the chain to the prior
November 14, 2017 receipt at a price of $18,000. The diamond chain and the emerald and
diamond suite collectively comprise the “Jewelry” that is subject to this dispute. Klein told
Zebede that he did not have a check to cover the cost of the diamond chain but that Wildenstein
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was “good for” the payment for the extra item, and Zebede agreed. As noted above, Wildenstein
has stipulated that she is indebted to Regal in an amount that covers this additional item.
The record is not completely clear as to when the post-dated checks were delivered to
Regal. The parties stipulated in the Joint Pretrial Order that the checks were delivered “on or
about November 14, 2017.” However, Zebede testified at trial that he believed the delivery
occurred at the end of November 2017. Zebede’s prior testimony (to the effect that the
conversation with Klein occurred a few days after the Sotheby’s event) suggests the delivery
could have been as early as November 16 or so, but did not likely occur on November 14.
The record does makes clear that on November 16, 2017 Klein sent a photograph of the
emerald and diamond suite to BLCE, along with a copy of an appraisal report. A representative
of BLCE texted back that he was stepping into a meeting but would “work on it shortly.” See
PX 25. On November 22, 2017, Klein delivered four of the five parts of the emerald and
diamond suite (excluding an emerald pendant) to BLCE as collateral for a loan in the amount of
$50,000. See PX 26. The loan had a due date of March 22, 2018.
Klein contacted BLCE again on November 30, 2017, stating that “Jocelyn needs a little
more cash” and asking if he could bring the pendant and the diamond chain he had obtained from
Zebede to BLCE as collateral for an additional loan. On December 4, 2017, Klein delivered the
emerald pendant, plus the diamond chain, as collateral for a loan in the amount of $20,000. See
PX 27. The $20,000 loan had a due date of April 4, 2018. Id.1
Klein was listed as the borrower on each loan, but BLCE issued two checks to the order
of “Jocelyn Wildenstein JW1AE LLC” that were offered in evidence. See PX 28. One check
1 	The parties stipulated in the Amended Joint Pretrial Order that the loans were made on
November 22, 2017 (ECF. No. 29, ¶ 7, at p. 3), but the documentary evidence plainly shows
that there were two separate loans on two separate dates.
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(dated November 22, 2017) was in the amount of $25,000, and the other check (dated December
4, 2017) was in the amount of $10,000. The record contains no explanation of why the first
check was less than the amount of the first loan. However, the parties have stipulated in the Joint
Pretrial Order that all of the proceeds of the loans were paid to Wildenstein.
Wildenstein testified at her deposition that she believed she would sell her apartment in
late 2017 and that she believed, when the checks were issued, that the proceeds of the apartment
sale would provide sufficient funds to cover the checks in the future. However, neither party
offered any evidence as to whether or not a contract for sale of the apartment had actually been
signed, or as to what the status of the purported sale was. Nor did the parties present evidence as
to Wildenstein’s finances in November 2017. On the other hand, the relevant bank records show
that the JW51AE, LLC account on which the checks were written had very little funds both
before and after November 2017. In addition, the harsh financial terms of the pawn transactions
with BLCE – which required the payment of finance charges of more than $14,000 for a four-
month loan of $70,000, which is an effective annual rate of interest of 60% – are not loan terms
to which persons of ample resources would normally agree, and are indications of financial
desperation.
Klein invoked his fifth amendment privilege against self-incrimination in response to
many of the questions he was asked at his deposition about these matters. Regal has asked me to
draw adverse inferences from Klein’s invocation of the Fifth Amendment, and Wildenstein has
argued that I should not draw adverse inferences against Wildenstein based on Klein’s actions. I
do not need to resolve that legal issue, however, because after reviewing all of the testimony I do
not need to draw adverse inferences in order to make the factual determinations that are relevant
for this Decision. I find from the evidence that at all relevant times Klein acted in concert with
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Wildenstein and with her full knowledge, participation and approval. When Klein and
Wildenstein contacted Zebede after the Sotheby’s event to discuss a purchase of the emerald and
diamond suite their actual plan was to use that jewelry as collateral for a short-term loan from
BLCE. They did not disclose this to Zebede. Instead, they represented that Wildenstein wished
to purchase the emerald and diamond suite because she admired it and wanted to own it for her
own use. Zebede negotiated with them in good faith with the understanding that Wildenstein
would retain possession of the jewelry and that the proposed deferred payments were purely
matters of convenience. I asked Wildenstein’s counsel (at the end of the trial) whether he
believed that Zebede would have agreed to sell the Jewelry and to accept four post-dated checks
if he’d known that Wildenstein and Klein did not wish to buy the Jewelry for its own sake and
that they instead wanted to use the Jewelry as collateral to obtain high-interest, short-term loans
from a pawn broker; counsel admitted that Zebede likely would not have done so, and I find that
Zebede would not have done so. I also find that if Zebede had known that Wildenstein and Klein
planned to use the $250,000 emerald and diamond suite as collateral for a short-term loan from a
pawn broker then Regal (through Zebede) would not have extended credit for the purchase of the
additional $18,000 diamond chain.
In fact, Wildenstein and Klein never told Zebede that they had pawned the Jewelry.
When Zebede attempted to deposit the first of the post-dated checks (in January 2018), the check
bounced. Over the next several months Zebede pleaded with Klein and Wildenstein either for
payment or for a return of the Jewelry. Klein and Wildenstein repeatedly represented that they
had possession of the Jewelry (which was false), that they would return the Jewelry if that is
what Zebede wanted (which they could not do and which was also false), that there was no issue
as to Wildenstein’s ability to pay because she was a billionaire, that wire transfers had been sent
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but had somehow failed to go through (which was false), and that Zebede should just be patient.
In short, they repeatedly offered false reassurances to keep Zebede at bay. See, e.g., text
messages offered as PX 29.
Procedural History
An involuntary chapter 7 bankruptcy petition was filed against Wildenstein on March 20,
2018 (Case No. 18-10766). Wildenstein then filed her own voluntary chapter 11 petition on May
4, 2018 (Case No. 18-11388). Wildenstein’s chapter 11 case was consolidated with the prior
case and the prior case was deemed to have been converted to a chapter 11 case. At the time of
Wildenstein’s bankruptcy filing BLCE still had possession of the Jewelry. However, the
schedules of assets and liabilities that Wildenstein filed with her bankruptcy petition did not list
the Jewelry or the BLCE secured claim. See Case No. 18-11388, ECF No. 1. Those schedules
also did not list the debt that Wildenstein owed to Regal. Id.
At a court conference on May 16, 2018, counsel to Wildenstein acknowledged that Regal
had inquired about the Jewelry and stated that “[w]e were [sic] trying to have the jewelry
returned to Regal” but that they were still looking into the issue. See May 18, 2018 Tr. (Case
No. 18-10766, ECF No. 19) at 12:15 – 14:5. The Jewelry was not returned, and Regal filed a
motion on May 24, 2018, seeking discovery to assist in determining the status and location of the
Jewelry. Case No. 18-10766 at ECF No. 18. The Court held a hearing on that motion on June
20, 2018, at which time Regal’s counsel stated that he had been told by Wildenstein’s counsel
that the Jewelry was in a safe deposit box and that Regal hoped to work out a settlement that
would include a return of the Jewelry. See June 20, 2018 Tr. (Case No. 18-10766 at ECF No.
66) at 7:19 – 8:21. In fact, as the parties have stipulated, the Jewelry was still in the possession
of BLCE at the time of the hearing.
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Regal subsequently complained (by letter dated July 2, 2018) that it had been told for the
first time on June 29, 2018 that an unidentified third party had possession of the Jewelry and had
refused to release it except upon a payment of $80,000. See Case No. 18-10766 at ECF No. 33.
Wildenstein’s counsel filed a responsive letter that for the first time revealed the identity of
BLCE as the party who had possession of the Jewelry. Regal then learned (upon contacting
BLCE) that BLCE had already sold the Jewelry pursuant to the terms of the pawn transaction.
See Case No. 18-10766 at ECF Nos. 34, 35.
Regal filed the Complaint in this adversary proceeding on August 13, 2018. Regal
contends that the debt owed by Wildenstein is excepted from discharge under a number of
different theories. More particularly:
 	Regal contends that Wildenstein inflicted a “willful and malicious injury” on Regal or
on Regal’s property and that discharge would be inappropriate pursuant to 11 U.S.C.
§ 523(a)(6);
 	Regal contends that Wildenstein acquired the Jewelry by “larceny” or by
“embezzlement” and that discharge is inappropriate pursuant to 11 U.S.C.
§ 523(a)(4);
 	Regal contends that Wildenstein obtained the Jewelry by false pretenses or by false
promise or by “actual fraud,” and that discharge is inappropriate pursuant to 11
U.S.C. § 523(a)(2)(A);
 	Regal contends that Wildenstein obtained the Jewelry by use of a false written
statement regarding financial condition, and that discharge is inappropriate pursuant
to 11 U.S.C. § 523(a)(2)(B).
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Discussion
I. 	Burden of Proof.
A creditor seeking to prove that a debt is excepted from discharge under § 523(a) must do
so by a preponderance of the evidence. See Ball v A.O. Smith Corp., 451 F3d 66, 69 (2d Cir
2006). Wildenstein argues that the portions of Regal’s contentions that are based on allegations
of fraud, larceny or embezzlement should instead require proof based on a “clear and convincing
evidence” standard. See Defs’. Post-Trial Mem. (ECF No. 30) at 6 (citing Great Am. Insur. Co.
v. Graziano (In re Graziano), 35 B.R. 589, 593 (Bankr. E.D.N.Y. 1983). It is true that if Regal
were suing in the New York State courts to establish the existence of a debt based on contentions
of fraud it would need to prove its case based on clear and convincing evidence. Crawford v.
Franklin Credit Mgmt. Corp., 758 F.3d 473, 491 (2d Cir. 2014) (citing Gaidon v. Guardian Life
Insurance Co. of America, 94 N.Y.2d 330, 349–50 (1999); see also Waran v Christie’s Inc., 315
F Supp 3d 713, 718 (S.D.N.Y. 2018). However, the existence of the debt is not at issue here;
Wildenstein has admitted that she owes a debt to Regal. The only issue in this proceeding is
whether that admitted debt should be excepted from discharge based on fraud or for other
reasons. The dischargeability of the debt is a matter of federal law (not state law), and the
United States Supreme Court has squarely held that in order to show that a debt should be
excepted from discharge on the ground of fraud a plaintiff need only prove fraud by a
preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 286-90 (1991). The
contrary authorities that were cited by Wildenstein all pre-date the Supreme Court’s decision in
Grogan and are inapposite.
II. 	The Asserted Claims.
Some of the theories upon which Regal has relied are plainly not relevant to this case.
“Larceny” would require a showing that Wildenstein engaged in a wrongful taking of property
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belonging to another person without that person’s consent and with the intent to convert the
property. See JP Morgan Chase Bank, NA v. Selig (In re Selig), 8-17-70042-REG, 2018 WL
889350, at *6 (Bankr. E.D.N.Y. Jan. 24, 2018). The evidence plainly showed, however, that
Wildenstein obtained the Jewelry pursuant to a purchase transaction, and that Zebede voluntarily
gave possession of the Jewelry to Wildenstein. Zebede contends that he was defrauded and
deceived by false pretenses, that his consent should be treated as involuntary, and that the alleged
fraud therefore should be equated with “larceny.” But “fraud” and “false pretenses” are their
own separate grounds for an exception from discharge, so Regal’s attempt to equate fraud and
false pretenses with “larceny” adds nothing to Regal’s case.
Proof of “embezzlement” requires proof that property was entrusted to Wildenstein for
her care and that she subsequently appropriated that property for her own use and without the
owner’s consent. See Moonan v. Bevilacqua (In re Bevilacqua), 53 B.R. 331, 333-34 (Bankr.
S.D.N.Y. 1985); Bioconvergence LLC v. Attariwala (In re Attariwala), No. 19-00828, 2020 WL
3443808, at *2 (Bankr. D.C. 2020). Again, however, the evidence showed that the parties
engaged in a purchase transaction. The Jewelry was sold to Wildenstein (not “entrusted” to her)
and was transferred with the understanding and agreement that she would put it to her own use.
Once again, Regal argues that Wildenstein committed fraud, that his consent should be treated as
involuntary and that the alleged fraud should be equated with embezzlement. But as stated
above, fraud and false pretenses are their own separate grounds for an exception to discharge, so
Regal’s attempt to equate them with “embezzlement” adds nothing to its case.
Regal has also argued that Wildenstein willfully and maliciously injured Regal or Regal’s
property and that the debt is excepted from discharge for that reason. See 11 U.S.C. § 523(a)(6).
Proof of a “deliberate or intentional action that leads to injury” is not sufficient to except a debt
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from discharge under section 523(a)(6); instead, Regal must show that Wildenstein not only
acted wrongfully, but that she actually intended to inflict an injury. See Kawaauhau v. Geiger,
523 U.S. 57, 61-62 (1998). Regal argues that a monetary injury that is deliberately inflicted
(through fraud, for example) may constitute a “willful and malicious injury” to property for
purposes of § 523(a)(6). But if Regal proves “fraud” or “false pretenses” in connection with the
underlying debt then there is no point to giving further consideration of whether Wildenstein not
only committed an intentional wrong but also intended to injure the victim.
Regal has also contended that Wildenstein obtained the Jewelry by use of a false written
statement regarding her financial condition. However, there is no evidence that Wildenstein did
so. The only written documents that were identified were the post-dated checks that Wildenstein
issued. Those were not “financial statements” and they were not (by themselves) statements of
financial condition. They also could not reasonably be construed as representations that the
underlying bank accounts already held sufficient sums to cover the checks, because Wildenstein
and Klein made it quite clear that the whole reason they wanted to post-date the checks was so
that they could first obtain an infusion of funds through the sale of Wildenstein’s apartment.
Regal’s real claim is that Wildenstein obtained the Jewelry from Regal, and obtained an
extension of credit by Regal, through actual fraud or through false pretenses. Proof of actual
fraud requires proof that (1) the debtor made representations; (2) those representations were false
when they were made; (3) the debtor intended to deceive the creditor; (4) the creditor relied on
the misrepresentations; and (5) the creditor sustained losses as a result. Matter of Selenberg, 856
F.3d 393, 398 (5th Cir. 2017). Regal argues that Wildenstein falsely represented that the post-
dated checks would clear in the future when presented for payment. Certainly Wildenstein had
greater knowledge than Zebede had about the risks that Zebede was taking by accepting the post-
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dated checks. However, the evidence fell short of proving that Wildenstein actually believed (in
November 2017) that the checks would bounce when presented for payment in the future. Regal
also contends that Wildenstein and Klein lied about Wildenstein’s financial condition, but
misrepresentations about financial condition are only grounds for an exception from discharge if
they are made in writing. See 11 U.S.C. § 523(a)(2)(A) and (B).
The evidence at trial did prove multiple examples of outright lies that Wildenstein told to
Zebede (or that she caused Klein to tell to Zebede) after the first check bounced in January 2018.
These lies included statements that Wildenstein still had possession of the Jewelry (which she
did not), that she had sent payments (which she had not done), that she would soon send
payments (which she did not intend to do), and that Wildenstein could and would return the
Jewelry to Zebede if he so desired (which Wildenstein has stipulated she could not have done).
The problem, for Regal, is that these misrepresentations occurred after January 2018. They kept
Zebede at bay, but they were not the means by which the Jewelry was obtained or by which the
original extension of credit was obtained.
On the other hand, the “false pretenses” charge perfectly fits the conduct in which
Wildenstein engaged. “[F]alse pretense involves an implied misrepresentation or conduct
intended to create and foster a false impression” as opposed to an express misrepresentation.
Minority Equity Capital Corp. v. Weinstein (In re Weinstein), 31 B.R. 804, 809 (Bankr. E.D.N.Y.
1983). A debtor who purposefully creates a contrived and misleading understanding of a
transaction in order to induce an extension of credit has obtained credit by false pretenses. Evans
v. Dunston (In re Dunston), 117 B.R. 632, 641 (Bankr. D. Colo. 1990), aff’d in part, rev’d in
part, 146 B.R. 269 (D. Colo. 1992). Proof of false pretenses does not necessarily require proof
of overt misrepresentations. Instead, omissions or a failure to disclose on the part of the debtor
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can constitute false pretenses where the circumstances of the case are such that omissions or
failure to disclose deliberately create a false impression which is known by the debtor. See
Farraj v. Soliz (In re Soliz), 201 B.R. 363, 369 (Bankr. S.D.N.Y. 1996). Accordingly, a debt
should be excepted from discharge on grounds of false pretenses upon proof of (1) an implied
misrepresentation or conduct by the defendant; (2) promoted knowingly and willingly by the
defendant; (3) creating a contrived and misleading understanding of the transaction on the part of
the plaintiff; (4) which wrongfully induced the plaintiff to advance money, property or credit to
the defendant. In re Selig, 2018 WL 889350, at *7.
The evidence shows, and I so find, that Wildenstein actually wanted to obtain the Jewelry
from Zebede in November 2017 so that Wildenstein and Klein could use the Jewelry as collateral
for short-term, high-interest loans from a pawn broker. Wildenstein did not disclose that fact to
Zebede. Instead, Wildenstein deliberately led Zebede to believe that she wanted the Jewelry
because she admired it and wished to purchase it for her own continued possession, use and
enjoyment. In short, Wildenstein deliberately misled Zebede as to her true motives and intent
and deliberately created a contrived and misleading understanding of the purpose and the risks of
the transaction, knowing that she had deceived Zebede and with the intent to deceive him. She
used that contrived and misleading understanding to induce Zebede to sell the Jewelry to her and
to do so in exchange for four post-dated checks. Zebede justifiably relied on Wildenstein’s
representations and on the impression of the transaction that she falsely and deliberately created.
I find that Zebede would not have sold the emerald and diamond suite to Wildenstein, and would
not have extended credit by accepting post-dated checks, if Zebede had known that
Wildenstein’s true desire and plan was to obtain valuable property from Regal that Wildenstein
could deliver to a pawn broker. I find in addition that Zebede would not have sold the additional
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$18,000 diamond chain on credit if he had known of Wildenstein’s and Klein’s plans to pawn the
emerald and diamond suite. As noted above, Wildenstein’s counsel acknowledged at trial that it
is likely that Zebede would have refused to provide credit, and would have refused to accept the
post-dated checks, if he had understood Wildenstein’s true intent and plans. Zebede delivered
the property to Wildenstein, and extended credit, because he was deliberately misled as to the
purpose of the transaction and as to Wildenstein’s plans, and the unpaid debt to Regal was
incurred as a direct and proximate result of the false pretenses that Wildenstein created.
III. 	Other Requests for Relief.
In its complaint, Regal also asked for attorneys’ fees, costs and pre-judgment interest.
No basis for an award of attorneys’ fees has been offered and no proof was offered as to what
attorneys’ fees were incurred. If Regal believes that an application for attorneys’ fees is
appropriate under Rule 7054 it should make a timely application for the same. Similarly, after
judgment has been entered Regal should file an appropriate application for any award of costs
that it seeks.
The United States Supreme Court has held that if money or property has been obtained
by fraud the entire “debt” associated with that liability is excepted from discharge, including
treble damages, attorneys’ fees (if applicable) and other relief to which the creditor is entitled.
See Cohen v. de la Cruz, 523 U.S. 212, 223 (1998). If a creditor’s claim is excepted from
discharge, then whatever right the creditor has to prejudgment interest on that claim also is
excepted from discharge. See Tamman v. Schinazi (In re Schinazi), No. 06-10226 (BRL), 2010
Bankr. LEXIS 5111 at *49 (Bankr. S.D.N.Y. 2010). However, in this case the pretrial order and
other papers submitted by the parties contained no proposed calculation of pre-judgment interest,
no discussion of whether the interest rate should be governed by federal or state law, and no
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discussion of the date(s) from which interest should be calculated – for example, whether interest
should run from the date the checks were delivered, or whether interest should run only from the
date when each of the four-post-dated checks was supposed to be presented for payment. The
Court is therefore unable, on the present record, to identify the amount of the debt that is to be
excepted from discharge. The parties are hereby directed to file supplemental submissions on
these questions by no later than 5:00 p.m. on April 2, 2021.
Conclusion
For the foregoing reasons, I hold that Wildenstein obtained the Jewelry (and induced
Regal to extend credit) by false pretenses, and that the debt that Wildenstein owes to Regal
arising out of her acquisition of the Jewelry from Regal is excepted from discharge. The parties
are directed to file supplemental submissions on the prejudgment interest questions that are
described above. The entry of judgment will be deferred pending a determination of the
prejudgment interest issues.
Dated: New York, New York
March 24, 2021
s/Michael E. Wiles
HONORABLE MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE
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