A hearing has been set for October 6 focused on the potential compromise between (old) Diamond and its trustee Morgan W. Fisher and 15 publishers regarding the fate of consigned goods in possession of (old) Diamond and the warehouse of Sparkle Pop. While (old) Diamond, Fisher, and the publishers are in favor of the deal, lending bank JPMorgan Chase submitted a filing with a “reservation of rights” while Sparkle Pop submitted a filing objecting to the compromise. Now, Sparkle Pop has submitted a “memorandum of law” going into details about the negotiation over the consigned goods.

Here’s how things break down with the Sparkle Pop’s key points as well as revelations of the behind the scenes negotiations.

Inspection of Sparkle Pop’s Distribution Facility

Part of Sparkle Pop’s objection is the call for inspections of Sparkle Pop’s distribution facility which it calls “highly intrusive.” Publishers have filed a motion to get Sparkle Pop to open up the facility to inspect what remains and get a better account of what remains. There’s a belief that Sparkle Pop has sold more consigned goods than is known and that money would be owed for that.

Sparkle Pop believes the inspection is a fishing expedition to get more information to be used in what it calls “baseless and hypothetical claims” that would be brought against Sparkle Pop.

There has been hints at negotiations between the publishers, (old) Diamond, Fisher, and apparently Sparkle Pop. But, Sparkle Pop in their objection stated they were a part of the settlement agreement. Directly from their objection filing with the key part in bold:

If this Court were to approve the proposed settlement (negotiated without Sparkle Pop’s involvement and which wholly discounts Sparkle Pop’s interests), Sparkle Pop would not only have to relinquish its interests in the registry and escrow…

But, in this latest filing, Sparkle Pop says they were part of the negotiations:

The parties engaged in meet-and-confer discussions by email over the course of a week, during which Sparkle Pop made multiple unilateral concessions and provided supporting data. After the last round of Sparkle Pop’s concessions, however, when Sparkle Pop believed that the parties were negotiating in good faith towards a resolution, counsel for the Third-Party Plaintiffs abruptly terminated discussions without further explanation and brought this Motion.

But, this can be true as well, Sparkle Pop provided data and info but wasn’t part of direct negotiations. They also could have been involved at one point and it was determined they were being an obstacle to getting things settled as well. All of this is sure to come out at some point.

What has come out is that Sparkle Pop wanted publishers to pay for the inspection. In this latest filing, Sparkle Pop states they first proposed a fee of $1,000 per hour to “defray costs Sparkle Pop expected to incur” during the inspection as well as wanting the plaintiffs (publishers) to pay the rent and processing fees that Sparkle Pop claims it is owed. Sparkle Pop then reduced the proposed fee to $639.94 per hour and dropped the rent request entirely.

Sparkle pop then proposed:

1. The inspection would be carried out by Debtor’s former warehouse manager, Shawn Hamrick, with the assistance of persons designation by the Third-Party Plaintiffs, as preapproved by Sparkle Pop;
2. The Third-Party Plaintiffs to pay Sparkle Pop $639.94 per hour, to defray the significant costs Sparkle Pop would incur in connection with the inspection.
3. The inventory count for the inspection shall be a basic cycle count (i.e., a general inventory count by carton),
4. The inspection shall be completed no later than 10 business days from commencement of the inspection, shall be no more than one, 8-hour shift per day, and shall be conducted only after business hours or 5:00 p.m. Central Time.
5. Sparkle Pop shall not be required to stage the Consigned Inventory for the inspection,
6. No materials shall be removed from the Warehouse during the inspection, which would be strictly limited to Third-Party Plaintiff s consigned inventory, identified by location numbers.

Sparkle Pop claims they expect to incur a cost of $770.32 per hour for the inspection and include that logic in an exhibit you can read below.

According the Sparkle Pop, the publishers agreed to points 3 through 6 with “certain qualifications.” There was an objection to the first two points over what they saw as “unilateral control” over the inspector and there was no compromise candidate proposed. The second point was just rejected.

Sparkle Pop says the inspection is far more complicated than providing documents and that relevance needs to be proved because of that.

Who Owns the Stock?

Sparkle Pop continues to focus on the fact that who actually “owns” the consigned goods is still up for dispute. There’s over 30 lawsuits submitted by (old) Diamond against publishers in an attempt to resolve that question and that has yet to be decided upon and might not due to the compromise over the goods. In it, (old) Diamond gives ups its claims, which brings us to…

If There’s a Settlement, Do We Need the Inspection?

It feels like there’s some circular logic in this point. The publishers will need to pack and ship the goods as part of the settlement, but wouldn’t they need to know what’s there to ship? Sparkle Pop doesn’t seem to think so stating that the settlement is out there and that the consignors own the goods (which also seems to be odd to state since Sparkle Pop asked who owns it?), claims in cases go to the consignors, and Diamond abandons claims on the consigned goods.

Though Sparkle Pop objected to the settlement, they state they’re not against Diamond abandoning its claims:

Although Sparkle Pop has filed an objection to the motion to approve this settlement, it has not objected (and does not object) to the Trustee’s abandonment of the Estate’s claims to the Stock.

Sparkle Pop has issues with all of those cases between (old) Diamond and the publishers settled and then the publishers using the ongoing cases to try to get an inspection.

Because there is no remaining dispute as to the ownership of the Stock, the underlying adversary proceedings are effectively defunct, and if the proposed settlement between the consignors and the Trustee is approved, they will be entirely rendered moot. Under these circumstances, it is improper for the Third-Party Plaintiffs to simultaneously petition this Court to approve a settlement that resolves the adversary proceedings in their favor, while also invoking these same proceedings as the ostensible basis for seeking a highly intrusive physical inspection of Sparkle Pop’s premises.

Have they just asked for an updated inventory?

While publishers hint that they’ve asked for an update on inventory, Sparkle Pop says they haven’t. A “less intrusive” method than an inspection would be for them to ask the court to force Sparkle Pop to update the inventory list.

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You can read all of the filings below: