The week in Diamond: Publishers band together to get their inventory back…and a precedent found?

It was a quiet Week in Diamond last week, but a lot of news came just as the weekend was breaking. The subtitle is: The Publisher’s Strike Back. 

As we’ve previously reported, all hell broke loose on June 25th when “Diamond” announced plans to liquidate their inventory – even inventory that was in their warehouse on consignment and technically owned by publishers. This was a huge blow to many publishers, who had stored various amounts of their inventory at Diamond. For instance, Dynamite, which was exclusive with Diamond longest, has most of its inventory stored there. Losing it would be, I think it is pretty safe to say, catastrophic. 

While publishers spoke out to fight this, legal challenges have been filed – and more publishers are banding together. But the clock is ticking: 

Those who want to object to the motion have until July 16, 2025 to do so in writing and file it with the Clerk of the Bankruptcy Court (Objections to the Motion must be in writing and filed with the Clerk of the Bankruptcy Court, 101 West Lombard Street, Suite 8530, Baltimore, Maryland 21201, on or before July 16, 2025; and be served so as to be received on or before the Objection Deadline by the undersigned counsel for the Debtors.). The hearing on the motion is being held on July 21.

Magma Comix owner Denton J. Tipton, filed an objection, with their contract with Diamond attached – so many secrets now laid bare. The key clause is that this agreement was terminated upon “Either Buyer or Seller files a petition in bankruptcy.” Brett Schenker has more analysis and I urge you to read the above link for more information: 

At which point, the Diamond’s rights to sell the product ends if I’m interpreting it correctly and due to the termination, Magma was obligated to remove at its own expense all products held by Diamond unless Diamond has decided to sell the inventory to offset amounts due from the seller to the buyer. So, if Magma owed money, Diamond could keep the product and sell it to make up for that. The seller, aka Magma, has 60 days after the termination of the Agreement and with written demand/notice from Diamond to remove the inventory, otherwise Diamond has the right to dispose of inventory in how it deems or destroys the inventory.

However Schenker goes on to point out that this clause may not be enforceable. 

But, and it’s a big but, section 365(e)(1) of the Bankruptcy Code (federal) says this type of clause isn’t enforceable as it would prevent business with them in their contracts from doing any business when they declare bankruptcy. That, however, can vary by state and if the contract is void due to the general termination agreement or if any violation is narrow and just the ipso facto clause.

Bob Chapman, of Graphitti Designs, has also written to object to the sale:

I am writing to lodge my formal object to the motion referenced above. Our inventory was sent to Debtors on a consignment basis per the terms of our Supply Agreement, and is our property, not Debtor’s. My company has an ongoing financial interest in selling all merchandise that is still in Debtor’s warehouse.

Likewise, I object to Debtor’s continuing to sell these items without remitting payment to us. Debtor’s efforts to circumvent paying us fbr our property will not only jeopardize my company’s immediate future financially. but their flooding the market with our products acquired at liquidated prices will hurt our longterm ability to sell those same products through other distribution channels.

John Morrow, of TwoMorrws, has also filed an objection. 

Meanwhile, as noted above, publishers are banding together to fight the sale. Nick Barrucci, CEO of Dynamite, sent out the following alert on Friday afternoon:

“Notice to all publishers and vendors who distributed products through Diamond. Diamond or its successor entities have publicly moved to sell inventory currently in its warehouses without publishers’ consent. Several publishers are pooling their resources together to challenge these proposed sales procedures for this inventory. If you represent a company with inventory currently warehoused with Diamond or its successor entities and would like to learn more, please reach out to the following publishers who are helping to put together our group of vendors:”

Eric Reynolds at: [email protected]
Peggy Burns at: [email protected]
Nick Barrucci at: [email protected]

The response must be filed with the Maryland Bankruptcy Court by July 16th.   Please share this with any interested parties.

Nothing has brought home the urgent nature of this action than Nick Barrucci of Dynamite, Eric Reynolds of Fantagraphics and Peggy Burns of Drawn & Quarterly banding together to fight this. Not that they are enemies or anything, but I don’t think they ever interacted much in the past….if they had ever even met.

Despite this truly mighty assemblage of publishers, they may have an uphill battle: liquidation is a common result in bankruptcy proceedings, and Diamond claims that everyone needed to file an obscure form PRIOR to the bankruptcy to hold claim to their inventory. However, I have been advised that there is a possible controlling precedent from the 4th Circuit in the case of Leake v. Khaliq which ruled that consignment inventory was NOT owned by the debtors. 

You can read that below – it’s heavy on the legalese, and involves an antique store. 

In any event, either all of the creditors must be considered in determining the question under section 8.2-326 (3)(b) or it is reasonable to carve out not only the unscheduled consignment creditors but also those creditors who had no reasonable relationship to the business and would not have reasonably relied on the conduct of the debtors’ business for purposes of extension of credit. If all of the creditors are included, then 60% of the creditors knew that the debtors were substantially engaged in selling the goods of others. If both unscheduled consignment creditors

and consumer debt creditors are excluded from the computation, only one scheduled creditor [*6] out of the total of five business creditors did not know that the debtors were substantially engaged in selling the goods of others.

Thus, 80% of the included business creditors knew that the debtors were substantially engaged in selling the goods of others. Under either scenario, this court finds that Debbie Khaliq has carried her burden under section 8.2- 326(3)(b) by a preponderance of the evidence. See, Alper-Richman Furs Ltd., infra, at p. 150. This removes the goods from the definition of “sale or return” items under section 8.2-326 (1)(b) and brings them within the safe harbor of section 8.2-0326(2) as “sale on approval” items. Since there is no evidence that the goods were accepted they are not subject to the claims of debtors’ creditors. Accordingly, it is

ORDERED:

That the claim of Debbie Khaliq to the goods which she consigned to Walter D. Gregory and Twyla W. Gregory is SUPERIOR to the claim of the trustee in bankruptcy and the property consigned is not property of the bankruptcy estate. Accordingly, the trustee in bankruptcy shall make arrangements to return to Debbie Khaliq those items of property in his possession which were consigned and are shown on Attachment [*7] A to the trustee’s complaint.

This would seem to be good news for publishers/creditors, however, Virginia might not be a precedent for Maryland, and the details of the case are different. 

At any rate, publishers are taking action and filing motions. Will it be enough? The hearing will be held July 21st, the Monday of SDCC week, as if people didn’t have enough to worry about. 

A couple of notes: I spoke to one publisher at ALA who had already called back their inventory, before the liquidation crisis began and soon after the bankruptcy filing, Sandy King Carpenter of Storm King. I think it’s worth noting that Carpenter comes from outside the comics business (although she’s been at it long enough to know the game). I feel like a lot of publishers were caught up in Diamond’s “Business as usual!” statements, and decades of trust that had been built up and got blind sided by this. It might have been unwise, but certainly it is understandable. 

And another major player in all of this has finally spoken. For that, see our next story. 

Finally, speaking of speaking out, Chris Powell, formerly one of the most prominent public faces of Diamond, went on the Comic Industry Insiders podcast to talk. Powell was laid off on May 16th, along with many other Diamond/DST and ComicSuite personnel. I haven’t had time to listen to the whole thing, but one note that was brought to my attention: Powell confirms that once the bankruptcy was filed, Diamond’s actions were controlled by bankruptcy administrator Robert Gorin and other financial personnel. So basically in talking about all of this there is Ancient Diamond (run by Steve Geppi and the usuals); Old Diamond, which started on January 14th, and was run by Robert Gorin et al; and New Diamond, currently controlled by whoever is running Sparkle Pop.

Also, given all of this turmoil and legal maneuvering, how is it that New Diamond is STILL not paying people? Or talking to them at all?

We knew it would be a disaster, but maybe not this a disaster that had this many twists and turns.