The Consignment Inventory Dispute in the Diamond Bankruptcy is not over, sadly.
As we predicted, Sparkle Pop has filed an objection to the settlement between the Diamond Estate and the Consignment Group. As a third party in the agreement, they have a lot to say about why the publishers can’t just breeze into the Olive Branch warehouse and pick up their inventory. The settlement doesn’t solve anything, they argue:
In actuality, however, all that has been accomplished is to extricate the Trustee and JPMorgan Chase from the consignment disputes while significantly increasing the remaining disputes (and litigation) between the Consignment Group Members and Sparkle Pop. The proposed settlement would require this Court to adjudicate every single aspect of the dispute between the Consignment Group Members and Sparkle Pop over goods located in Mississippi and over which the Trustee and the Estate no longer have any vested interest.
This is a lengthy document that comes down to a lot of “Hey we never agreed to this!” In addition, Sparkle Pop says they are owed processing fees of $433,270 for selling the consignment goods both before and after the court told them to stop selling them and $1,000,000 in rent and storage fees from the estate.
As a refresher, the settlement came down to the Consignment Group being allowed to go pick up their inventory while the Estate would get more than $800,000 that was being held in escrow from sales of the inventory made by Sparkle Pop. The settlement included a LOT of language about how to go about the pik&pak for the inventory and compelling Sparkle Pop to go along with it, perhaps anticipating these objections.
As always, Graphic Policy has a concise write-up of the documents and says Sparkle Pop is “playing the victim” – which seems to sum it up:
Ever since Sparkle Pop purchased the Debtors’ assets, it has been unfairly placed in the middle of the dispute between the consignors and the Debtors (now the Trustee). Without a judicial determination of ownership, Sparkle Pop could not have and still cannot release the consigned goods to one party without exposing itself to legal claims from the other parties.
They also claim that allowing people to just come in and get their stuff would be dangerous and possibly open to more litigation:
The Warehouse has floor-to-ceiling warehouse racking, with substantial inventory stored at elevations requiring material-handling equipment and trained personnel. Bieg Affidavit at ¶ 3. Much of the consigned inventory consists of heavy paper and comic products creating additional safety concerns when retrieving product from upper-level racking. Bieg Affidavit at ¶ 4. The Warehouse also contains a bonded area, creating additional access, security, customs-compliance and inventory controlled requirements. Bieg Affidavit at ¶ 5. Allowing outside representatives to enter the Warehouse and locate, pick move, pack and pallet their own inventory creates significant safety, liability, operational, inventory-control, and chain-of-custody risks. Bieg Affidavit at ¶ 6.
While I am not a lawyer, in reading Sparkle Pop’s objection it relies heavily on conjecture and what ifs and is low on legal backing: what about the adversary proceedings? What if there is more litigation? Can untrained personnel actually find the inventory? It also argues that since the Estate has given up any claims to the consignment inventory, they now have no right to say how the publishers should pik and pak and palletize that inventory:
The Sparkle Pop Pik&Pak Option is also riddled with issues. This option apparently provides for Sparkle Pop and the Consignment Group Member to agree on the terms and conditions for the pick, pack, pallet and pick-up of the consigned goods but it is also vague and ambiguous. Essentially, this provision forces Sparkle Pop to separately negotiate with each Consignment Group Member (and for this Court to adjudicate any disputes arising from the negotiations). This Court should not have to take this type of role in negotiations that do not involve any property of the Estate.
Meanwhile, according to the filing, Sparkle Pop was able to passively fill orders all along just fine.
This particular dispute arose because, at the time the assets were handed over, Debtors failed to segregate the consigned inventory from other inventory, and Debtors, who had control over both the website and ordering system, failed to pull the consigned inventory from its website and ordering system. In light of these failures, Sparkle Pop was unaware that certain of the inventory was consigned inventory and passively fulfilled orders from its end-customers.
While Sparkle Pop admits that bankruptcy law allows the court to approve a settlement or compromise, they should not approve this one, they argue:
Here, the Motion should be denied because the proposed settlement, among other things, (1) fails to resolve the underlying core disputes, (2) unfairly exposes non-participants such as Sparkle Pop to additional potential litigation, (3) improperly forces obligations on third-parties including Sparkle Pop, who are not parties to the settlement, without proper consideration of their interests (for example, electing a pick and pack option that would cause a massive disruption to Sparkle Pop’s Warehouse business), (4) fails to pay Sparkle Pop its processing and rent/storage fees; and (5) requires this Court to oversee, supervise and adjudicate every single aspect of the proposed settlement (even though the Trustee admits the consigned goods are owned by the consignors, assigns his rights in the adversary proceedings and abandons any interest he does have in the consigned goods).
BUT WAIT, THERE”S MORE.
The one secured creditor in all this is Chase Bank, which kept on lending Old Diamond money to keep operating after they filed for bankruptcy. In a filing last week, Chase piped up on the settlement, saying basically, “Hey this settlement sounds alright, but don’t forget you owe us $6,541,667.19.”
In a footnote to their own filing, Sparkle Pop mentions that consignors who are NOT part of the settlement have been negotiating their own agreements, but the spectre of Chase is still looming over it all:
Further, with respect to Chase, as of the date of the filing of this Objection, Sparkle Pop has been in separate settlement negotiations with the Trustee and the consignors that are not part of the settlement proposed in the Motion. These parties have reached tentative agreement on terms but, to date, Chase has not agreed on the settlement. and the Trustee is insisting that Chase has to agree to the terms of the agreement between the Trustee, Sparkle Pop and the remaining consignors. Chase further filed a response and reservation of rights to the Motion asserting its claim to any funds paid to the Trustee as part of this proposed settlement. As a result, and until and unless this is resolved, Sparkle Pop is objecting to the proposed settlement set forth in the Motion.
So….are we back to square one? Not quite, but the judge in this case has a lot of judging to do. Far from washing their hands of the matter and going about their business, Sparkle Pop seems set on objecting every step of the way – but do they have legal standing to do so? That’s up to the court to decide.
Looking back on the long, long trail of woe that the Diamond Bankruptcy has created, it’s hard for this observer not to see this as yet another botched decision by the original trustee in the Chapter 11 case. Had that trustee not been so set on selling the inventory more than a year ago, the current Estate wouldn’t have so many storage and rental fees to pay out of the relatively meagre assets that still remain. While they were trying to play a waiting game with publishers, hoping they would give up on retrieving their inventory, that plan seems to have backfired.
Fortunately, the comics industry is still going about its merry way, selling comics and making deals. But Steve Geppi may not be so lucky. The way I read the initial loan agreement with Chase, he and his holdings are liable for the remainder of that debt. As we like to say, more to come.
Here’s the entire Sparkle Pop objection:
Click to access gov.uscourts.mdb.791767.1331.0.pdf
