The bankruptcy trustee for the estate of Diamond Comic Distributors has asked a judge to approve a financing agreement to hire lawyers for litigation against Alliance Entertainment, the consignors, and potentially others.
The Alliance litigation involves some $30 million in counter-claims by the Diamond estate against Alliance, including an $8 million deposit currently being held in escrow. The litigation was originally launched by Alliance Entertainment related to its withdrawal of an approved offer to purchase Diamond Comic Distributors and Alliance Game Distributors after discovering that Wizards of the Coast was no longer a supplier (see “Alliance Entertainment Sues Diamond, Again”).
The consignment litigation, of course, is between Diamond and its consignment suppliers over the estate’s plans to seize and sell the inventory stored at Diamond’s warehouse at the time of the filing, valued at nearly $50 million at cost (see “Court Denies Consignors’ Motions”).
Another purpose of the financing for professional fees is to fund an examination of payments made in the 90 days prior to the bankruptcy filing or made to insiders for the year prior to the filing. Those payments can be reversed if they are determined to provide an unfair preference to insiders or outside companies. The amounts are substantial: there were $67 million in payments made in the 90 days prior to filing, and $12 million was paid to insiders (including transfers to related companies) in the year prior to the filing. The trustee described his plan. “While the Trustee must perform a proper preference analysis to make final determinations as to Avoidance Actions that are worth pursuing (it does not appear that any pre-conversion estate professional performed any comprehensive preference analysis), the Trustee anticipates the possibility of significant preference recoveries.”
The financing agreement with Debtor-in-Possession lender JPMorgan Chase is the only way the trustee can complete his work, the motion argued. Cash on hand is $340,000 and the bank is due around $7 million. The bank has agreed to advance another $766,000 if the new agreement is approved, apparently willing to risk that amount to see if it can recoup more from the trustee’s actions.
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