Luxury jeweler Lugano Diamonds & Jewelry Inc. secured the green light to tap up to $1.5 million of a larger $12 million Chapter 11 financing package as it launches a desperate search for a buyer during the peak holiday shopping frenzy.

A Delaware bankruptcy court on Tuesday issued interim approval for the debtor-in-possession funding, supplied by majority owner and prepetition lender Compass Group Diversified Holdings LLC. The ruling came during a tense first-day hearing in Wilmington.

“In the absence of this relief, the reorganization effort would suffer the risk of immediate and irreparable harm,” said U.S. Bankruptcy Judge Brendan L. Shannon, granting the interim order.

A High-End Liquidation Unlike Any Other

Judge Shannon also signed off on an interim agency-sale partnership with Enhanced Retail Funding LLC, an affiliate of Gordon Brothers, signaling that Lugano’s dazzling inventory—diamonds, fine jewelry, and luxurious display fixtures—will begin moving quickly.

According to court filings, ERF will immediately take charge of selling Lugano’s merchandise, furniture, fixtures, and equipment.

ERF’s attorney, Steven Fox of Riemer & Braunstein LLP, stressed that this will not resemble a bargain-bin retail collapse.

“We’re not going out there with sandwich boards or bikini-clad women waving ‘going out of business’ signs,” he told the court. “This is a completely different population of inventory—and a very different client base.”

Chapter 11 Sale on the Fast Track

Lugano is simultaneously preparing for a formal Chapter 11 sale. The bid deadline is set for the day after a Dec. 11 procedures hearing, with a final sale hearing scheduled for Dec. 17.

If no competing offer emerges, Lugano plans to enter into an equity deal with ERF that guarantees the estate 40% of the aggregate cost value of its goods—a structure that also operates as a stalking-horse bid, setting the minimum bar for rival bidders.

Concerns From the Watchdog

Timothy Jay Fox Jr. of the U.S. Trustee’s Office raised alarms about ERF having excessive access and influence in the early stages, warning that giving a potential buyer the ability to “look, feel and touch” the merchandise on day one tilts the playing field.

Judge Shannon acknowledged the concern but ultimately overruled the objection, saying the arrangement “preserves a measure of optionality” and that the level of control was not “fatal to the request for limited relief.”

A Company Under a Cloud of Accusations

The bankruptcy filings reveal a company at war with its own past leadership. Lugano and its affiliates filed late Sunday amid mounting lawsuits tied to the alleged conduct of former CEO and founder Mordechai Haim Ferder.

According to the declaration of Chief Restructuring Officer J. Michael Issa, Ferder was removed in May after being accused of luring business partners to invest in individual diamonds with promises of returns that never materialized. Lugano sued him in June for fraud and breach of fiduciary duty, and up to 60 potential diamond claimants have since stepped forward.

Compass conducted an internal audit after Ferder’s ouster and discovered the business had been far less profitable than it appeared, the declaration states.

Massive Debt, High Stakes

Compass, which purchased just under 60% equity in Lugano for $256 million in 2021, holds all of the company’s secured debt. That includes $212 million in revolving loans, $467 million in term loan obligations, and $2.63 million in letter-of-credit debt.

Among Lugano’s 30 largest unsecured creditors, all but two are “diamond claimants,” each asserting more than $1 million in losses.

Founded in 2005 by Ferder and his wife Idit, Lugano grew into an ultra-luxury brand with jewelry priced over $1 million, a loose-diamond business, an equestrian division, philanthropic ventures, and even an exclusive private social club designed to attract elite clientele.

Counsel

Lugano is represented by Young Conaway Stargatt & Taylor LLP and Keller Benvenutti Kim LLP.
Compass is represented by attorneys from Polsinelli PC and Squire Patton Boggs LLP.
ERF is represented by Riemer & Braunstein LLP and Ashby & Geddes PA.
The U.S. Trustee’s Office is represented by Timothy Jay Fox Jr.