By Susan Thea Posnock

New York—Diamond wholesale giant M. Fabrikant and Sons, which filed for Chapter 11 bankruptcy protection last fall, auctioned off the majority of its assets to its lenders.

The U.S. Bankruptcy Court in the Southern District of New York approved the sale of assets of M. Fabrikant and Sons Inc. and its domestic subsidiary, Fabrikant-Leer International, to Wilmington Trust Corp. and Surya Capital LLC in May.

Wilmington Trust, a financial services company based in Wilmington, Del., that represents Fabrikant's current secured lenders, purchased the majority of the assets—including loose diamonds and receivables—from both companies.

According to court papers, the company paid $41.5 million. Surya Capital, which describes itself as a "distressed hedge fund" on its Web site, paid $10.4 million for the Fabrikant-Leer inventory.

Lee Stremba, an attorney with Troutman Sanders—the law firm that represented Fabrikant in the bankruptcy procedures—says the Surya sale closed in June.

"When the assets were put up for sale, the two possibilities were a totally unrelated third party would bid cash for assets, or the group of lenders would give the debtor a credit against their claim in exchange for some of the assets," he says.

This process, called credit bidding, means the lenders bid for a certain asset, take the asset and then reduce their claims by the amount bid.

"They can do basically whatever they want with that asset, whether they choose to operate it or sell it, it's up to them," Stremba says.

While it was unclear what their plans would be going forward—Wilmington Trust declined to comment on the matter—Stremba says representatives for the lenders participated in the Las Vegas trade shows.

"The lenders who were buying the inventory but hadn't yet closed [the sale] went to the Las Vegas show with the debtor employees and, in a cooperative manner, marketed those diamonds," he says.

Fabrikant gained court approval to auction assets in April. Assets cited in court papers included inventory from both companies, accounts receivable from both companies and the 27 percent interest that Fabrikant holds in Fabrikant-Tara International.

The minimum reserve prices that Fabrikant, in consultation with retained professionals, set for its assets totaled $48.5 million, court papers said. Prior to the asset sale, Fabrikant owed lenders about $140 million. At the time it filed for bankruptcy, the company stated it had annual sales of $370 million.

Stremba says the asset sale brought in several million dollars over the reserved price set by the company.

It is unclear what the ultimate impact of the asset sale will be on the 112-year-old company, which has numerous domestic and international subsidiaries that were not impacted by the bankruptcy and are still functioning.

"It really only has an impact on the two debtors," Stremba says, adding that now that the operating assets have been sold, the remaining assets related to the bankruptcy will be sold or liquidated over time.

Stremba says the company will be terminating the month-to-month lease at its Manhattan headquarters at Rockefeller Center in the near future.

Fabrikant Chief Executive Officer Matthew Fortgang, representing both M. Fabrikant and Sons and Fabrikant-Tara International at the JCK Las Vegas show, would not comment on the assets sale.

He noted that business at the show had been good. Phone calls seeking comment after the Vegas shows ended were not returned.