In a first for the troubled bankruptcy case of Diamond Comic Distributors, a filing by a group of consignment publishers has asked the court to withhold a fee payment to one of the law firms working for Diamond, citing concerns about a Diamond administrative insolvency.
An administrative insolvency would occur if Diamond is unable to pay its post-petition debts, costs, and fees, despite the presence of debtor-in-possession financing and moneys collected from the sale of its assets. The issue was first raised in court by David E. Rice, the judge in the bankruptcy case, in August, in urging a fast resolution to the dispute over Diamond’s attempt to seize and sell consignment inventory in its warehouse (see “Diamond in ‘Administrative Insolvency Jeopardy’”). Those post-petition claims are supposed to be paid on a timely basis, even as debts that existed at the time of the bankruptcy filing are frozen.
In this new filing on October 2, the Consignors Group, which includes Dark Horse, DSTLRY, Dynamite, Oni-Lion Forge, and Titan, among others (see “Eventful Hearing”), filed a limited objection to the payment of fees to Stephenson Harwood LLP, Diamond’s UK attorneys. The Group did not object to the fees, but to their immediate payment, arguing, “There exists a substantial risk of administrative insolvency in the Debtor’s cases.” The fling asked for protections so that all “similarly situated administrative claimants” (i.e., all the companies with similar post-petition claims) would receive a “ratable distribution” (i.e., all the post-petition claims would get a similar percentage of the total moneys owed).
Diamond continued to operate its comic and game distribution companies between the bankruptcy filing in January and the sale of most of its assets in May, presumably running at a substantial loss even worse than its losses in the previous year, as it bled suppliers and customers and sales declined.
In the months since the bankruptcy, Diamond has also run up over $15 million in legal and advisory fees (see “Fees Top $15 Million”). During that time it has not been paying all of its vendor invoices on time, owing Dynamite over $500,000 (see “Dynamite Asked Court”), and delaying payments to suppliers to Alliance Game Distributors as well (see “Diamond’s Post-Petition Debts”).
The upshot is that the situation for Diamond’s creditors is continuing to deteriorate, and the likelihood of a full or even a significant recovery for the money owed when bankruptcy was filed is plummeting. This applies mostly to creditors of the comic distribution part of the business; Alliance Game Distributors’ pre-petition payables were taken over as part of the purchase price (see “ICv2 Interview: Universal CEO Angelo Exarhakos”). While it’s coming at a time of healthy consumer demand, the damage to the comic business, especially to smaller publishers heavily reliant on Diamond, may be profound.
Source: ICv2
