Put a Diamond Under Stress, and You Might Crack

That rose-gold ring, worth up to $15 million by one estimate, was to be the centerpiece of a Christie’s auction last week, until legal actions in Manhattan scuttled the sale minutes before it was to start — on two successive evenings.

BEDAZZLING Ralph O. Esmerian, center, encouraged actresses like Cameron Diaz, top, to wear his jewelry and hired Peter E. Bacanovic, above, as president of his estate jewelry concern, Fred Leighton. Now Mr. Esmerian is at the center of a battle over a big part of his collection

A few minutes after 6, when the auction had been set to start, the cellphone of François Curiel, the director of Christie’s jewelry department, rang. He listened, said thank you and hung up.

“There is no auction tonight,” he announced to a small group of international jewelry dealers gathered at Christie’s Rockefeller Center rooms.

“Disgusting!” cried a prominent London dealer, who grabbed his coat and stormed out.

More than one of the dealers was angry at Christie’s itself, for trying to sell in such a rushed and uncertain manner what Mr. Curiel had called in the sale’s 154-page glossy hardcover catalog “one of the greatest jewelry collections of all times.” After all, to paraphrase Oscar Wilde, to abort a highly anticipated jewelry sale once may be regarded a misfortune; to abort it twice looks like carelessness.

Mr. Esmerian was apoplectic about the planned auction being forced by Merrill Lynch. In an emotional interview on Tuesday, he shook his head in dismay as he thumbed through Christie’s lavishly illustrated catalog, pointing to beloved items of jewelry collected by him and by his late father, Raphael Esmerian, a gem dealer who emigrated from Paris in 1940.

“The estimates are disastrously low,” Mr. Esmerian said. “It’s a fire-sale presentation. These are special pieces that deserve some respect. It’s like a magnificent Fifth Avenue mansion being offered for the price of a Third Avenue condo.”

How did Mr. Esmerian — an aesthete educated at Groton and Princeton who until last year controlled a jewelry collection estimated to be worth hundreds of millions of dollars — land in such a predicament? His lawyer Helen Davis Chaitman ascribed his woes to a clash of cultures between her client, an amiable philanthropist who has given millions to museums, she said, and Merrill Lynch bankers who issued and capriciously rescinded his credit.

“Ralph is not a hedge fund person,” Ms. Chaitman said. “He’s not a vulture. He’s a man of such extraordinary kindness.”

Among other philanthropic work, Mr. Esmerian is chairman emeritus of the American Folk Art Museum, to which he pledged 400 works in 2000.

Mr. Esmerian said his relationship with Merrill Lynch began on an upbeat note in November 2005 when the firm agreed to lend him $57 million, backed by the collateral of his “Special Collection,” a group of around 100 pieces of rare jewelry. The loan, Mr. Esmerian said, was for estate-planning purposes.

With the bank’s encouragement, Mr. Esmerian borrowed $110 million more in March 2006, in part to buy Fred Leighton, an estate jewelry company with stores on Madison Avenue and at the Bellagio in Las Vegas, which had raised the profile of estate jewelry in the United States.

The company aggressively pursued Hollywood actresses to parade its showpieces on the red carpet, including Sarah Jessica Parker, Cameron Diaz and Ellen Pompeo. In 2006, Dolly Parton strutted at the Oscars in diamond bracelets, brooches and briolette pendant earrings on loan from Fred Leighton, boasting to reporters, “This cost $1,200,000.”

IN acquiring Fred Leighton, Mr. Esmerian planned to sell museum-quality jewels from the family’s Special Collection in a retail setting, along with thousands of other pieces from his private stock. (Until then his business was mostly wholesale, consigning jewels to Cartier and other luxury stores around the world.)

Merrill Lynch, he said, ratified the plan. “The Merrill Lynch people always said if you need to buy a special jewel, just come to us and we’ll find the money,” Mr. Esmerian said. “That was in the good old cowboy days when all of this was fun.”

After he made timely payments for more than a year, Mr. Esmerian said, the merriment expired abruptly in September 2007 when he called his bankers at Merrill Lynch to ask for two weeks’ leeway for half his monthly interest payments of $1.5 million. “They said, ‘Sorry, we can’t give you any more time to pay the interest,’ ” he said.

“Ralph is an artist, not a businessman,” Ms. Chaitman said. “In his world, being a week late on a payment is nothing. When he sells a million-dollar piece of jewelry the client might walk out of the store without paying for it. He understands that it takes time for people to liquidate assets. People don’t have money sitting in cookie jars.”

Ms. Chaitman places the blame for Merrill’s decision to force the sale of Mr. Esmerian’s jewels on the bank’s own internal woes related to the subprime mortgage crisis. The bank has taken some $30 billion in mortgage-related write-downs since last year; on Thursday it announced layoffs of 2,900 employees.

Bill Halldin, a spokesman for Merrill Lynch, said the action against Mr. Esmerian is “completely unrelated” to the company’s losses. He said Merrill did not file a legal action against Mr. Esmerian until January, after it had spent the final three months of 2007 trying to reach a “forbearance” agreement with him, which would have set new repayment terms and allowed his business to stay solvent.

“In December we had reached agreement on negotiated terms for a forbearance that would have avoided court,” Mr. Halldin said, “but he refused to sign the documentation needed.”

In its legal complaint, Merrill said that Mr. Esmerian’s failure to live up to the loan terms began months before he stopped making timely payments. The legal papers assert that he sold jewelry that had been promised as collateral and failed to deposit funds from those sales into accounts controlled by Merrill, as required by the loan agreement. Mr. Esmerian also failed to provide required information to the bank about the whereabouts of his jewelry collections, according to the complaint.

(Ms. Chaitman responded that her client had been forthcoming with Merrill Lynch about his jewelry holdings and that money from some jewelry sales did not go into proper accounts because of a mistake by another bank.)

Mr. Halldin noted that Merrill Lynch is not a jewelry company. Just as a bank might auction a foreclosed house for less than full market value because it wants to get its money back and has no interest in becoming a landlord, Merrill wanted to turn its collateral — the jewelry — into cash.

ANOTHER concern of Merrill’s, Mr. Halldin said, was Mr. Esmerian’s hiring of Mr. Bacanovic, a former stockbroker with a criminal record. The bank discussed its misgivings with Mr. Esmerian.

Ms. Chaitman said it was she who had introduced her client to Mr. Bacanovic, whom she had known for decades because he and her daughter were friends from their days at Manhattan private schools.

Fired from his job at Merrill and banned from the securities industry, Mr. Bacanovic had been struggling to find a new path after his release from prison in Las Vegas. “Unlike Martha Stewart, who came right out of jail and went back to running her company,” Ms. Chaitman said, “Peter did not have a platform to come back to.”

He had spent time in Los Angeles, but was back in New York, living on the Upper East Side and consulting for Judith Lieber, the handbag maker.

While Mr. Bacanovic is not a party to the litigation between Merrill Lynch and Mr. Esmerian, he is involved in pushing Fred Leighton forward, despite the continuing drama. He has changed the displays in the New York store, hired sales people, worked with a public relations team to publicize the brand and brought in his friends, Ms. Chaitman said.

Through a spokesman, Mr. Bacanovic declined to comment for this article. Although his social profile is far lower than in the days when he escorted Ms. Stewart around town, he still appears occasionally in boldface in publications like Women’s Wear Daily.

“He has an enormous group of friends and supporters,” Ms. Chaitman said. “And he mixes in a circle of people who can become Fred Leighton customers.”

In Manhattan courtrooms in the past week, Mr. Esmerian succeeded on Monday in having the Christie’s sale canceled. Then on Tuesday, a justice of the Appellate Division of State Supreme Court ruled at 4:10 p.m. that the auction could proceed. Bidders descended on the auction house.

But in a surprise move, Mr. Esmerian’s lawyers filed for bankruptcy protection of his companies at 4:20. The sale was off again. “In my 40 years at Christie’s, this is the first time it happens,” Mr. Curiel, the auctioneer, said after he had announced the halt, calming his nerves with a white wine spritzer at the bar.

Merrill Lynch was back in court on Wednesday asking the Federal Bankruptcy Court in New York to let the auction proceed. But after a day of testimony, a judge said no.

Merrill now seems to have given up on selling the jewelry. Both sides have taken a breath and seem resigned to working within the confines of bankruptcy court. “We think it’s positive that there will be close court supervision of all their activities,” Mr. Halldin said. In any case, the jewelry auction season has passed in New York, and the next one is not until December.

But Mr. Esmerian’s woes are not limited to his imbroglio with Merrill Lynch. Both Christie’s and Sotheby’s, where Mr. Esmerian has done business before, have pressed him to repay his outstanding credit balances. In the case of Christie’s, the debt was around $7 million. When the auction house filed suit to collect, Mr. Esmerian asked it to sell off a collection of his jewelry it had been holding for a long time, Ms. Chaitman said. On Wednesday, hours before the well-publicized Special Collection auction was canceled, the lesser Esmerian collection was sold, she said.

It seems that neither diamonds nor fine art are truly forever. Some of the paintings Mr. Esmerian gave to the American Folk Art Museum were outright gifts, and some were merely promised as gifts, with the understanding that they were being used as collateral on a loan from Sotheby’s.

A few weeks ago the museum was forced to take down one of its greatest prizes from Mr. Esmerian’s painting collection, a mid-1800’s masterpiece from Edward Hicks’s “Peaceable Kingdom” series that had hung at the museum since its West 53rd Street building opened in 2001. The painting was sent to Sotheby’s, where it is estimated to fetch up to $8 million, which will be applied to Mr. Esmerian’s $11.5 million debt.

Although a promise is only a promise, the museum was taken by surprise. “We didn’t know about Ralph’s problems,” said Susan Flamm, a spokeswoman.

The removal of the painting from the wall was done with decorum befitting the benefactor.

“It wasn’t yanked,” Ms. Flamm said. “It was gently handled.”