Diamond’s Chapter 11 process has been a rollercoaster, but I thought we’d gone through the final loop. I was wrong, and it might now be in a dangerously dire situation for Diamond.
The new scary loop comes as Alliance Entertainment filed a court complaint against Diamond Comic Distributors, alleging fraud and deception contributed to the collapse of Alliance’s planned acquisition of the distributor. The filing reveals Alliance withdrew its winning bid after discovering Diamond had allegedly concealed the termination of its distribution agreement with Wizards of the Coast.
The legal action follows a tumultuous bidding process. Alliance Entertainment initially won the bid for Diamond during its bankruptcy proceedings. However, Diamond subsequently expressed a preference for a joint bid from Universal Distribution and Ad Populum. After Alliance threatened legal action, its initial bid received final approval. In a surprising turn, Alliance then withdrew from the acquisition agreement.
Now, Alliance has followed that up with a Court complaint.
According to the complaint filed by Alliance, the withdrawal occurred because Diamond allegedly failed to disclose that Wizards of the Coast would not be renewing its distribution agreement beyond December 2024. Alliance contends that Diamond and its representatives actively attempted to hide this crucial information during the negotiation period.
The court filing states that Alliance terminated the purchase agreement only after learning about the Wizards of the Coast situation and after Diamond reportedly refused to negotiate a lower purchase price to reflect the loss of business.
The complaint includes five specific counts against Diamond and its representatives involved in the process. Alliance Entertainment is seeking damages amounting to $8.5 million, plus accrued interest, and reserves the right to seek further damages determined at trial.
Here’s some of the text;
- Defendants fraudulently misrepresented the status of the Debtors’ relationship with Wizards of the West Coast LLC (“WOTC”), the Debtors’ largest vendor accounting for approximately 25% of the Debtors’ Alliance Gaming Business revenue, as part of an intentional scheme to induce Plaintiff to purchase the Debtors’ assets for tens of millions more than the true valuation of those assets. On March 6, 2025 and April 9, 2025, Defendants repeatedly and intentionally represented that Debtors’ relationship with WOTC remained strong and in good standing. Defendants knew this was false. As Plaintiff recently learned, in December 2024, prior to the Petition Date (defined below), WOTC decided that they would not renew the Distribution Agreement (defined below) beyond the December 31, 2024 termination date, thus reducing the Debtors’ Alliance Gaming Business revenue by at least 25%, other than a short 90-day extension as an accommodation to assist the Debtors in their upcoming bankruptcy case and to induce the Debtors to grant WOTC critical vendor status upon the Debtors’ receipt of authority to grant such status to certain vendors. Upon information and belief, the Debtors were aware of WOTC’s decision in December 2024.
- Defendants kept this closely guarded secret from Plaintiff, all other bidders in the Auction (defined below), and the Court. For example, Defendants redacted the termination dates from the WOTC agreements that were disclosed to Plaintiff (and, presumably, other bidders). A sliver of truth came to light on April 12, 2025, only after the execution of the AENT APA (defined below) and entry of the Sale Approval Order (defined below), when the Debtors, for the very first time, provided Plaintiff with an unredacted copy of the Distribution Agreement and its amendment, revealing the imminent termination of the WOTC relationship. The Debtors then waited another five days before revealing, for the first time, on April 17, 2025, that WOTC would not renew the Distribution Agreement.
- Far from confessing to their deception, on April 17, 2025, Defendants feigned outrage, calling the termination “shocking,” “coming out of nowhere,” and a “slap in the face,” given the Debtors’ twenty-five-year relationship with WOTC. Defendants’ falsehoods were finally laid bare on April 21, 2025, in a video conference involving WOTC, AENT, and the Debtors. WOTC revealed that its decision to terminate the Distribution Agreement was made—and the Debtors were aware of the decision—in December 2024, because the Debtors’ business with WOTC had declined by more than 8% over the last four years, during which period each of WOTC’s other four distributors had significantly increased their sales. Importantly, Debtors did not refute WOTC’s characterization on the video conference.
- After this revealing call, AENT tried to salvage the WOTC relationship by proposing to pay WOTC a fixed sum and agreeing to minimum purchase commitments, in exchange for WOTC extending the Distribution Agreement through December 31, 2025. WOTC rejected the proposal.
- AENT still sought to move forward with closing the AENT APA transaction, subject to an adjustment in the purchase price to reflect the loss of the WOTC relationship, but the Debtors refused to engage in those discussions. Left with no other option, AENT issued a Notice of Material Adverse Change on April 23, 2025 and terminated the AENT APA on April 24, 2025, as was its right to do pursuant to section 8.1(f) of the AENT APA, based on a Material Adverse Change in Debtors’ operations. A little more than a day later, the Debtors announced that they were moving forward with the sale of Debtors’ assets to another party, the identity of which has not been disclosed.
- In addition to defrauding Plaintiff, costing it millions in fees and expenses since its initial bid submission, the Debtors now refuse to return AENT’s earnest money deposit of $8.5 million, providing no reasonable justification for doing so.
My concern, and I don’t seem to be alone, is that all this means the future looks bleak for Diamond.
Via GraphicPolicy.com.
