It was a big week in the Diamond Bankruptcy case, if by big you mean a hearing was held and several motions were granted. But significantly, one motion was denied.
I’m going to give links to Graphic Policy’s blow by blow coverage of this week’s tussle below but here’s a summary.
A hearing was held on Monday regarding several matters, including the Trustee’s plans to hire more fancy lawyers and an accountant. The lawyers are to both defend against the Alliance lawsuit and to try to find more money from improper transactions before the bankruptcy filing.
Judge Rice granted the motions to hire more firepower. And significantly, he granted the Trustee’s motion to borrow more money from Chase to pursue more legal actions, including getting claims to the Consignment Inventory, aka The Stuff.
However one motion was denied, and that was the Trustee’s “motion for entry of an administrative order establishing procedures for interim compensation and reimbursement of chapter 7 professionals.”
This seemed like a fairly procedural filing with dates and deadlines for reimbursement submissions and so on. So why was it denied?
I’m not entirely sure, but I’ve heard from multiple sources that at the hearing the judge seemed to be skeptical of the fiscal practicality of the Trustee’s plan to use the consignment money to pay everything off, and also their failure to pay rent and insurance on the consignment stock, currently held by Sparkle Pop in Diamond’s old warehouse.
Meanwhile, just to round things off, Sparkle Pop’s filing threatening to put a lien on The Stuff because of the failure to pay rent, got objections from both publisher groups. The Ad Hoc committee fired back, arguing that the stock could easily be moved, and that a lien could not be placed under Mississippi law:
Sparkle Pop cannot establish that it holds a valid interest in the goods because under Mississippi law, it would need to first establish that the Debtor has continuing authority to require Sparkle Pop to store or sell the Consignors’ Stock. Miss. Code Ann. §75-7-210. This is because Sparkle Pop’s purported lien is not effective against “a person with a prior legal or perfected security interest in the goods unless that person entrusted the goods to the bailor with authority to store or sell them.” Id., §75-7-209. The Consignors never entrusted Sparkle Pop to store the Consignors’ Stock. If the TSA and the Consignors’ distribution agreements are in fact rejected, then the Debtor and the Trustee have no authority to entrust Sparkle Pop with the storage of the Consignors’ Stock until and unless the Trustee prevails in the pending Consignor adversary proceedings.
There’s a lot more but it’s very technical and boring.
So who is going to get The Stuff? Whichever way it goes, there are two possibilities for how this plays out.
- Things drag on with increasingly miserable haggling over legal statutes – this seems impractical because as the judge noted, the longer it drags on the more money the Trustee needs to pay the lawyers and the more money he needs to borrow so on and so on.
- Some kind of settlement is reached. The matter of The Stuff was kicked to mediation last year but that didn’t reach any kind of resolution. However, talks have been ongoing since then, and who knows, maybe we can have peace in our time.
The wild card in both scenarios is Sparkle Pop, which is demanding its cut for storing The Stuff while all this drags on.
So…..not much clarity or resolution. Yet. This will all end, someday.
It is within the realm of possibility that the unsecured creditors (the publishers) may have to pay to get Their Stuff back, and that money would, in theory, be used to pay those same unsecured creditors the money Diamond owed them from way back in the day, if any cash is left after Chase Bank and Sparkle Pop are paid – unlikely but legally possible.
You can read more filings and commentary at Graphic Policy and ICv2 here and here
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