Yesterday, we kicked off going over a flurry of filings concerning Diamond‘s chapter 7 case. The first we went over was a surface level look at trustee Morgan W. Fisher‘s motion for new financing from JPMorgan Chase Bank. JPMorgan Chase Bank was the bank originally providing the “debtor in possession” financing during Diamond’s chapter 11, in short providing a loan that allowed them to operate through the process.
Fisher is asking the court to enter a new DIP credit agreement. There’s some interesting nuggets from the motion. Here’s some highlights:
WHEREAS, all obligations of the Debtors under the DIP Loan Documents became automatically due and payable in full on the Maturity Date of December 29, 2025. The Debtors’ failure to pay such obligations in full resulted in Events of Defaults under the DIP Loan Documents.
WHEREAS, on March 10, 2026, the DIP Lender filed its proof of claim No. 27 asserting its rights, claims, liens and interests under the DIP Loan Documents and the Final DIP Order (the “JPMorgan Proof of Claim”). In the JPMorgan Proof of Claim, the DIP Lender asserts the current outstanding amount owing from the Debtors to the DIP Lender under the DIP Loan Documents is not less than $6,579,473.92 in the aggregate, with interest, costs and attorneys’ fees continuing to accrue, pursuant to the terms and conditions of the Final DIP Order and the DIP Loan Documents.
Technical Amendments of Final DIP Order and DIP Credit Agreement and Reinstatement of DIP Credit Agreement. The DIP Credit Agreement is reinstated, effective upon the Bankruptcy Court’s approval of this Stipulation. The Maturity Date under the DIP Credit Agreement is extended through and including June 30, 2027. The Maximum DIP Facility Amount is increased to and including $8,200,000. All references in the Final DIP Order, the DIP Credit Agreement and the DIP Loan Documents to the Debtors/Borrowers shall be deemed amended to include the Trustee as the authorized Borrower under the DIP Credit Agreement. Following return of the Letter of Credit (as defined in the Final DIP Order), the DIP Lender is authorized to draw and apply the funds securing the Letter of Credit to the outstanding indebtedness under the DIP Credit Agreement without further order of the Court.
The Trustee Borrowings are capped at $766,000.00 in new advances, plus such further uses of cash collateral as are authorized under the Stipulation, not to exceed the Maximum DIP Amount of $8,200,000 (“Trustee Borrowing Cap”).
While the need for more money for the chapter 7 process is news enough. The full filing goes deep into the reality of where things stand as well as where Fisher thinks there’s money to be gained in the chapter 7 process.
The Trustee currently has cash on hand of approximately $340,000.00 in his controlled trustee accounts. Additional funds in the approximate amount of $150,000.00 are held in JPMorgan bank accounts that may be subject to competing third party claims and disputes.
Part of the change from a chapter 11 filing to chapter 7 filing for Diamond was concerns that funds were drying up for Diamond to continue to function and JPMorgan not interested in extending a loan. As mentioned above, Diamond still owes JPMorgan $6,579,473.92 from their original DIP agreement. We get a sense of some of where things stand currently for Fisher when it comes to cash on hand. $340,000 is not a lot, especially when one newly hired consultant in the case will cost a minimum of $700,000 for ongoing litigation (more on that later) and the mentioned amount owed by Diamond to JPMorgan alone. We wonder if there’s accounts not “controlled” by the trustee beyond what’s held by JPMorgan. The wording gives me pause and seems very specific.
So, where is the money to pay off these creditors going to come from? Strap in, because there’s a lot laid out here.
Alliance Litigation Payment Waterfall
Fisher has a lot of confidence in litigation involving Alliance Entertainment. Kramon & Graham, P.A. is being proposed as the “Special Litigation Counsel” and focused on the litigation regarding Alliance Entertainment.
The Trustee believes that the Debtors have viable defenses to the Alliance claims and that the estates have viable, significant claims against Alliance. The Trustee believes that the potential recovery for the Debtors’ bankruptcy estates in the Alliance Litigation could be significant.
Kramon & Graham, P.A. will be paid a flat fee of $700,000 and then 25% of the gross recovery exceeding $2.8 million up and above the $700,000. So, if Kramon & Graham got $3 million in the case, they’d get an additional $50,000.
How much are we talking here? How about over $30 million.
In the Alliance Litigation, the Debtors asserted, (and the Trustee intends to pursue), counterclaims seeking approximately $30 million on damages from Alliance, which include the release to the estates of an $8 million deposit in escrow. Given the complexity, scope, and potential value of the Alliance litigation, the Trustee proposes to retain, subject to Court approval, Kramon & Graham, P.A. (“K&G”), specifically attorneys Jean Lewis and David Shuster, as special litigation counsel to prosecute the estates’ claims in the Alliance Litigation.
That’d be $6.1 million for Kramon & Graham, P.A.? We’ll go through the Alliance documentation again and report exactly what the counterclaim damages are (the $8 million is easy to figure out) but the back and forth between Diamond and Alliance Entertainment has gone on for close to a year now and pretty crazy with accusations. Today, new rulings as far as confidentiality and a protective order were dropped. We’ll also be following up on that.
But, if they got that $30 million, who would it go to? Fisher lays that out in his motion which you can see below.
3.1 Alliance Litigation Payment Waterfall. If the Alliance Litigation is concluded and/or Settled in whole or in part, then, the distribution of any Alliance Proceeds remaining after payment of any unpaid portion of the K&G Flat Fee, any amount due to K&G for the K&G Contingency Fee, and any unreimbursed and authorized K&G Expenses shall be made as soon as practicable, and allocated as follows:
(i) First, to repayment of all Trustee Borrowings then outstanding.
(ii) Second, to payment of the Alliance Statutory Trustee Fee;
(iii) Third, to payment of any portion of the Trustee’s Professional Fees in excess of the Trustee’s Professionals Retainer, specifically approved and authorized by JPMorgan in writing following consultation among and between the Trustee and JPMorgan, and pertaining to services and expenses actually performed and incurred in the Alliance Litigation, and
(iv) Fourth, to JPMorgan to be applied to the amounts outstanding under the Final DIP Order, the DIP Credit Agreement and this Stipulation until JPMorgan has been paid in full;
(v) Fifth, to the Bankruptcy Estate. Any remaining portion of unpaid Trustee’s Professional Fees in excess of the Trustee’s Professional Retainer and not specifically approved and authorized by JPMorgan shall be paid from this portion of the Alliance Proceeds.
Consignment Litigation Payment Waterfall
The fight over consigned goods has been going on almost as long as the entire chapter 11/chapter 7 case. At the heart of that is the want by Diamond to sell of goods it has in its possession that were provided by publishers. Of course, publishers want their goods back, stating the contracts are no longer valid. All of that is before the court and court of appeals. The amount of goods isn’t quite clear as not all publishers are involved in disputes but we’re talking $10s of millions potentially for Diamond if they sold the inventory (I believe the inventory was over $100 million). But, the longer this dispute continues, the less that the inventory is possibly worth.
The estates also hold significant claims arising from consignment-related disputes. The Consignment Litigation implicates important rights in inventory, proceeds, and other assets that may yield value for the estates. The Trustee has and will continue to pursue the Consignment Litigation.
Below is how that money would be split out if Diamond prevails in court.
3.2 Consignment Litigation Payment Waterfall. If the Consignment Litigation is concluded and/or Settled in whole or in part, then, the distribution of any Consignment Proceeds shall be made as soon as practicable, and allocated as follows:
(i) First, to repayment of all Trustee Borrowings then outstanding.
(ii) Second, to payment of the Consignment Statutory Trustee Fee;
(iii) Third, to payment of any portion of the Trustee’s Professional Fees in excess of the Trustee’s Professionals Retainer, specifically approved and authorized by JPMorgan in writing following consultation among and between the Trustee, JPMorgan and Shapiro Sher, and pertaining to services and expenses actually performed and incurred in the Consignment Litigation, and;
(iv) Fourth,
(a) Seventy-five percent (75%) of the remaining Consignment Proceeds to JPMorgan (to be applied to the amounts outstanding under the Final DIP Order, the DIP Credit Agreement and this Stipulation until JPMorgan has been paid in
full;
(b) Twenty-five percent (25%) of the remaining Consignment Proceeds to the Bankruptcy Estate. Any remaining portion of unpaid Trustee’s Professional Fees in excess of the Trustee’s Professional Retainer and not specifically approved and authorized by JPMorgan shall be paid from this portion of the Consignment Proceeds.
Avoidance Litigation Payment Waterfall
This one is fascinating. Avoidance Litigation Payment is basically going over money previously paid out to make sure it passes the smell test.
The Debtors’ SOFAs indicate 90-day transfers in the aggregate amount of approximately $67 million, and approximately $12 million in 1-year insider transfers. While the Trustee must perform a proper preference analysis to make final determinations as to Avoidance Actions that are worth pursuing (it does not appear that any pre-conversion estate professional performed any comprehensive preference analysis), the Trustee anticipates the possibility of significant preference recoveries
Sounds like something might not have been kosher this past year? Due diligence is great but “anticipates the possibility of significant preference recoveries” sounds like something is up. There might be even more drama coming down the pipeline!
And here’s that payment plan if this is successful.
3.3 Avoidance Litigation Payment Waterfall. If any Avoidance Litigation is concluded and/or Settled in whole or in part, then, the distribution of any Avoidance Proceeds shall be made as soon as practicable, and allocated as follows:
(i) First, to repayment of all Trustee Borrowings then outstanding.
(ii) Second, to payment of the Avoidance Statutory Trustee Fee;
(iii) Third, to payment of any portion of the Trustee’s Professional Fees in excess of the Trustee’s Professionals Retainer, specifically approved and authorized by JPMorgan in writing following consultation among and between the Trustee, JPMorgan and Shapiro Sher, and pertaining to services and expenses actually performed and incurred in the Avoidance Litigation, and;
(iv) Fourth,
(a) Seventy-five percent (75%) of the remaining Avoidance Proceeds to JPMorgan (to be applied to the amounts outstanding under the Final DIP Order, the DIP Credit Agreement and this Stipulation until JPMorgan has been paid in full;
(b) Twenty-five percent (25%) of the remaining Avoidance Proceeds to the Bankruptcy Estate. Any remaining portion of unpaid Trustee’s Professional Fees in excess of the Trustee’s Professional Retainer and not specifically approved and authorized by JPMorgan shall be paid from this portion of the Avoidance Proceeds.
That’s Fisher’s plan laid out, a three pronged approach to get as much money as possible to pay back creditors… how much to the actual publishers is a whole other thing.
None of this is guaranteed and interested parties have time to object to any of this as well as the recent proposals to add additional staff.
