Diamond files to convert their bankruptcy to Chapter 7

For the last few months, it’s seemed inevitable that Diamond would have to convert its Chapter 11 bankruptcy to a Chapter 7 bankruptcy – and on Friday they made it official, filing a motion to move into Chapter 7. Instead of reorganizing under a Chapter 11, a Chapter 7 means liquidation of all remaining assets. 

This grim outcome has been obvious for months, as bills for lawyers, accountants and other administrative costs piled up to the tune of $12 million. Diamond’s operating expenses prior to the auction for their assets were paid by a loan from JP Morgan Chase Bank, but they continued to run up debts as more lawsuits and disputes were filed – all, ironically, to get more money to pay off those same debts. And now Chase has said “no more” and the result is Chapter 7. 

In other words, Damond’s bankruptcy has become the gigantic clusterf*ck that we were all fearing. The incredible twists and turns the case took along the way were headed to this conclusion all along.  

Even Diamond admitted this in the opening of their filing:

As the Court is aware, these have been challenging cases. Among other things, these cases have involved a sale process with a back-and-forth designation of winning bidders that included Alliance Entertainment, LLC (“AENT”) as the successful bidder at auction, and Universal Distribution, LLC (“Universal”) and Sparkle Pop, LLC (“Sparkle Pop”) as back-up bidders. A key result of this back-and-forth sale process, which included a disputed termination by AENT of its asset purchase agreement, was that Universal and Sparkle Pop, as the ultimate purchasers of the Debtors’ assets, and notwithstanding the terms of their respective asset purchase agreements,demanded substantial reductions in their respective purchase prices in order to proceed. These amended transactions were ultimately approved by the Court. 

Throughout this process, the Debtors have worked cooperatively with their lender, JPMorgan Chase Bank, N.A. (the “DIP Lender”), and their Unsecured Creditors’ Committee in maximizing value for the estate. In this regard, the DIP Lender and the Debtors have entered into certain amendments and extensions to the Debtors’ DIP Credit Agreement, which provided continued financing and liquidity to the Debtors’ estates as they have sought to monetize their assets for the benefit of their creditors. 

The most recent amendment to the Debtors’ debtor-in-possession financing agreement extended the Maturity Date under the DIP Credit Agreement to November 14, 2025. Since that date, the Debtors have held discussions with the DIP Lender regarding potential additional financing and a further amendment to the Debtors’ debtor-in-possession financing agreement. In the course of those discussions, the DIP Lender advised that it was unwilling to finance further administration of these cases in Chapter 11. 

You can’t really blame Chase given the mess that has unfolded. All of this came to a head in a hearing last Monday, December 8th, when Diamond’s lawyers warned the court that they would be filing Chapter 7. Since then, Chase has agreed to one more little loan to cover the conversion of the case.  (A budget for this runs to $794,294.)

What will happen now? The case will be converted “effective as of 11:59 p.m. on the fifth (5th) business day after entry of the Proposed Order (the “Conversion Date”). As opposed to the case being handled by a Chief Restructuring Officer, in this case Robert Gorin, the case will be handed over to a Bankruptcy Trustee appointed by the court. 

But what about the consignment inventory you must be asking? In case you’ve forgotten, many publishers sent their inventory to Diamond as consignment, but because they failed to file a UCC, Diamond claimed they now controlled it as part of the initial bankruptcy, and would sell it off to pay Chase Bank. Publishers objected, Diamond was forced to file 30 separate adversary proceedings against the publishers, and the dispute was later turned over to mediation. Publishers were hoping to be able to get their inventory back for several reasons. First, given Diamond’s status as a monopoly for decades, most publishers have decades worth of backstock held by Diamond. It’s valuable on its own. Even more, if it were all to be liquidated for pennies on the dollar, it would severely impact publisher’s ability to continue to sell their own back list. 

Anyway, what will happen? According to the filing:

In response to this Order, and with the support of the DIP Lender, the Debtors filed over thirty complaints against various consignment vendors. Since filing these complaints, the Debtors have engaged in significant settlement negotiations with certain defendant consignment vendors and have participated in a mediation process, presided over by the Honorable Thomas J. Catliota (ret.), regarding, among other things, the issues raised by the adversary proceedings and by motions to compel assumption or rejection filed by the Ad Hoc Committee of Consignors and The Consignment Group in these cases. … While the Debtors and consignment parties continue to make meaningful progress regarding a resolution of the consignment issues, a global resolution has not yet been reached between the parties. 

Diamond still claims there is value to be had that may someday enable payment to creditors:

The Debtors’ post-sale closing efforts have enabled the Debtors to recover additional value for the Debtors’ estates and to continue their efforts to monetize assets for the benefit of their creditors. At this point in time, the Debtors’ remaining assets are comprised of claims and causes of action, as well as a disputed interest in the inventory subject to the Consignment Sale Motion. These litigations are ongoing and contested, and further time, effort and expense will be required to bring them to conclusion. The Debtors and DIP Lender have each determined that, at this point in time, and without ongoing funding for the Chapter 11, these litigations can most efficiently be pursued in Chapter 7. 

I’m not a lawyer but: my understanding is that by converting to Chapter 7, it’s essentially a whole new ballgame for the inventory. However, all assets are typically liquidated in a Chapter 7, and given the huge administrative debts that Diamond racked up, none of the money would be left for creditors. 

Surprisingly, a few people we spoke with who had knowledge of the matter feel that this outcome is not bad for the publishers. I’m working to get more clarity on this but just a guess: would publishers be able to buy back their stock under liquidation for less than they would have under mediation? 

A few other tidbits from the filing: Omni Agent Solutions, whose wonderful website has been a fountain of information about the Diamond case, will no longer be needed as claims and noticing agent. Given that they racked up a $613,314 bill to do this, you can understand why they are no longer needed. While they won’t be putting up the filings in the case any more (boo hoo), you can still follow along at Court Listener!

All contested matters and adversary proceedings will be put on hold while the case is converted and the trustee takes over. 

Here, a temporary stay of all contested matters and adversary proceedings is necessary and appropriate to allow for the appointment of a chapter 7 trustee on a permanent basis and provide the trustee with an opportunity to familiarize him or herself with the disputes in these cases. Furthermore, the imposition of a temporary stay would not prejudice the parties to the contested matters or defendants to the adversary proceedings. The adversary proceedings are in their early stages with discovery either not yet underway or having just started. A brief pause at this stage of the litigation would not prejudice the defendants. 

You might be asking yourself, will Steve Geppi, the original owner of Diamond Comic Distributors, be on the hook for any of this? The original loan was for $41 million, which would have been covered by the sale to Universal and Sparkle Pop which netted $57 million. But this was much less than they hoped for, and there were many other expenses along the way. Who will pay the piper? The listing of other loan parties on the ninth and final DIP agreement includes

COMIC EXPORTERS, INC.
COMIC HOLDINGS, INC.
DIAMOND SELECT TOYS AND COLLECTIBLES, LLC 
ROSEBUD ENTERTAINMENT, LLC 
RENEGADE GAMES, LLC 
GAME CONSOLIDATORS, LLC 
INDIVIDUAL GUARANTOR: Stephen A. Geppi, individually

If we go alllllllllll the way back to January 14th and the initial filings regarding the Chase loan it was stated: 

Debtor Diamond Select Toys & Collectibles, LLC (“DST”), and non-debtor affiliates Rosebud Entertainment, LLC (“Rosebud”), Game Consolidators, LLC (“Consolidators”), and Renegade Games, LLC (“Renegade”), subsequently joined as guarantors of the Credit Agreement (collectively, the “Entity Guarantors”). (*Debtor DST joined as guarantor under the Credit Agreement in late 2024 as a condition to a further amendment and forbearance agreement with JPM.)  Stephen Geppi, an executive officer of the Debtors, executed a Personal Guaranty dated January 15, 2024. 

Comic Exporters and Comic Holdings are two holding companies which owned Diamond UK. Diamond Select Toys was sold to Sparkle Pop and doesn’t exist any more. So they’re out for paying any more money to Chase. 

Rosebud Entertainment is a Geppi-owned holding company which owns Baltimore Magazine. Renegade Games would APPEAR to refer to Renegade Game Studios, a separate company owned by Scott Gaeta. However, Gaeta reportedly told a podcast that Geppi is a part owner, which is why they were a guarantor on the loan. 

Separately, the Board Game Insider Podcast reported earlier this month that Renegade Game Studios is a guarantor on $41m of debtor-in-possession financing from JP Morgan Chase, which was arranged by Diamond “to fund post-petition operating expenses and ensure adequate working capital to meet its obligations to associates and suppliers”.

It cited Renegade founder Scott Gaeta, who told the podcast Diamond founder Steve Geppi is an owner at Renegade, which was what prompted the guarantor arrangement.

Gaeta reportedly told the podcast that the guarantor arrangement would be over when the debtor-in-possession loan is paid back after Diamond is purchased, which is now expected to take place on April 10.

This is rather curious, but I haven’t listened to the podcast in question.

Game Consolidators is a shadowy entity about which I have been able to find nothing on the interwebs. Probably another holding company but its connection unknown. If you know, hit us up in the emails! 

Steve Geppi still owns many other companies, according to this profile in Baltimore Magazine, of all places. 

• Diamond Comic Distributors 
• Diamond Select Toys 
• Diamond Book Distributors
• Alliance Game Distributors
• Game Trade Magazine
• E. Gerber Products, LLC
• Scoop
• Gemstone Publishing
• Gladstone
• Another Rainbow
• Bruce Hamilton Company
• EC Comics
• GEM
• Morphy’s
• Hake’s
• Diamond International Galleries

I’ve made my best guess as to which companies still exist above but it’s just a guess. 

If you also go all the way back, there is the tiny matter of the money that Diamond owed its creditors. Here’s the listing of just the Top 30, which comes out to $31,836,382. 

In many ways, it’s fitting to go back to the beginning because with this conversion to Chapter 7, the case is starting over again. And we’ve had basically no movement, after nearly a year, to pay back creditors. Most publishers I spoke with wrote off the debt long ago, and given the boffo year in comics sales, we’ve seen shockingly few publishers go under. 

But we’re not done yet. The slog continues to go on and on.