As we’ve been reporting, today’s crucial hearing in the Diamond bankruptcy went the full day and has concluded for now but will be continued tomorrow.
As previously mentioned, the sale of Diamond UK was approved, with the shares held by joint holding companies Comic Exporters Inc. and Comic Holdings Inc. sold to an insiders group consisting of current Diamond uk management. Through all the current turmoil. Diamond UK has been doing business, making money and having satisfied customers so this seems to be a happy ending for that side of the business.
As for the other matters, also on the docket today:
- Diamond’s motion for the sale of the inventory it still has
- The Ad Hoc committee’s motion for a stay in Diamond’s motion for the sale of inventory
- A motion requiring Diamond to assume or reject contracts with some of the publishers
While I don’t want anyone to get their hopes up, justice being what is, I’m hearing that most of the activities today favored publishers. While not outright rejecting Diamond’s motion to sell the consignment stock, the judge did grant the Ad Hoc committee’s motion to stay the sale, which hinged on several things, notably the fact that the consigner’s stock had continued to be sold and that Diamond had not made it clear exactly what stock they were selling in the liquidation sale. In effect every consigner is being given a chance to clarify all of that in an adversary hearing.
31. Additionally, some of the Consignors may seek a termination of the respective agreements through the appropriate channels in this case, in which case the Debtor(s) will be required to return the Stock to the Consignors. It is imprudent to authorize a sale of the Stock at this time, without understanding which Stock is actually proposed to be sold; which Stock may be subject to return after termination of the respective Consignor agreements; and as stated above, without a proper finding as to whether the Stock is property of the Debtors’ estates.
32. The stay of the Motion also is necessary given the Debtors’ position regarding the Stock, as reflected in Distributor’s May E-Mail. The Debtors have blatantly violated the Bankruptcy Code with respect to requirements relating to executory contracts with the Consignors, and the assumption and assignment of the Consignors’ agreements. The Consignors’ Stock continues to be sold without payment to the Consignors, which gives rise to a plethora of actions against the Debtors, Ad Populum, and potentially the DIP Lender and other third parties to the extent that these parties received proceeds from the sale of non-estate property that the Consignors own. The Debtors must obtain a finding that the Stock (and all other stock sold post-petition) is property of the estate before this Court can authorize the sale of millions of dollars of Stock that clearly belongs to the Consignors and other parties similarly-situated.
33. For these reasons, good cause exists to stay the Motion until such time as (1) the Debtors have obtained a declaratory judgment from this Court confirming that the proposed Stock to be sold is, in fact, property of the Debtors’ estates; which declaratory judgment can only be achieved through (i) the Debtors’ commencement and service of a complaint on each of the respective consignors who delivered the Stock proposed to be sold; (ii) opportunity for discovery by all parties to the declaratory judgment action; and (iii) dispositive motions and/or trial on the causes of action identified in the Debtors’ prospective complaint; along with any subsequent appeals or expiration of deadline to appeal any such final order; and (2) the Debtors have amended the Motion to clarify which Stock is proposed to be sold.
As I understand it, while this is absolutely not an outright victory for the consigners/creditors it does gum up the works for “Zombie Diamond” quite a bit, as they will need to show additional paperwork and clarify who is owning and selling what. Which, given the confusion over the products “New Diamond” has sold from May 16th on, will be quite a task. But for the moment, the sale has been halted.
Again this is in no way final and more information could be revealed that ultimately swings things the other way. And I am not a lawyer and the information I’m getting right now is quite preliminary.
The hearing continues tomorrow.
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