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Diamond Accused Of Funnelling Bankruptcy Funds To Key Employees

Diamond Comic Distributors has been accused of attempting to funnel bankruptcy funds to key employees, according to court paperwork filed by the US Trustee.

In a recent filing with the United States Bankruptcy Court for the District of Maryland, Trustee Matthew W. Cheney has lodged a strong opposition to two motions presented by Diamond Comic Distributors and its debtors in their ongoing Chapter 11 bankruptcy case.  Filed today, he contests Diamond and the Debtors' proposals to implement key employment incentive and retention programmes as well as Diamond's request to seal sensitive information related to these plans. The Trustee's opposition argues that the proposed bonuses are unjustified, potentially violate the Bankruptcy Code, and lack transparency, ultimately harming creditors in favour of select employees, and paints a picture of Diamond attempting to siphon funds to favoured employees at the expense of creditors, contravening the Bankruptcy Code's intent.

The Trustee's filing notes in part that "the KEIP is not really an incentive bonus; it is a bonus to funnel money away from creditors and to certain favoured key employees. The KEIP violates the requirements of Section 503 and is not justified by the facts and circumstances of this case" and also that "the unredacted version of the KEIP provided to the United States Trustee reflects four Bonus Recipients whose title includes the term "president," five whose title includes the term "vice president," three whose title is "chief _____ officer," and five whose title is "director" of something. Thus, it appears from the limited information provided in the Bonus Motion that the KEIP may apply to more than simply three insiders."

Diamond Comic Distributors had secured a stalking horse agreement, a preliminary bid setting the floor for an auction, for Alliance Games and Diamond UK valued at approximately $39 million. The bidding process closed yesterday with an auction scheduled next week. On the 6th of March, two motions were filed to seek approval for bonus programmes and a sealing motion to redact details such as names, job titles, and salaries of bonus recipients from public view.

Key Employee Incentive Program proposes bonuses for 16 key employees tied to the sale price of Alliance and Diamond UK, with additional bonuses for six employees linked to the sale of the rest of the assets and one employee tied to other assets. Bonuses range from $560,250 if the sale price is between $30 million and $35 million to $1,009,500 if it exceeds $40 million. The Trustee argues that the KEIP is a misnomer, as the sale price thresholds are already met or easily attainable given the $39 million stalking horse bid and a minimum next bid of $40,865,000. With the auction concluding before the 27th of March hearing, the Trustee contends that the KEIP offers no real incentive, functioning instead as a retention bonus in disguise.

Similarly, the Key Employee Retention Program (KERP) targets 23 employees, offering bonuses totalling $241,900, roughly 10% of their annual salaries, to stay employed until the 10th of April, 2025, the end of the thirteen-week Chapter 11 process that Diamond is undergoing. A second tier offers seven employees an additional $35,000 to remain until the 31st of August 2025, when all assets are expected to be sold. The Trustee questions the necessity of the KERP, noting the absence of evidence that any recipient plans to leave or has a competing job offer within the initial short timeframe.

The Trustee's opposition hinges on provisions of the Bankruptcy Code, particularly Section 503(c), enacted in 2005 to curb excessive executive compensation during bankruptcy proceedings following high-profile scandals like Enron and WorldCom. It restricts retention bonuses to insiders (e.g. directors, officers) unless they have a bona fide job offer elsewhere, their services are essential, and the payments meet specific limits, none of which they claim that Diamond has demonstrated. The Trustee highlights that the KEIP's performance metrics are illusory, as the sale price is set before the hearing, rendering the bonuses a reward for simply staying employed rather than driving performance.

As for the sealing motion to conceal the names, job titles, and base salaries of bonus recipients, the Trustee argues this violates Section 107 of the Bankruptcy Code, which mandates public access to bankruptcy filings unless they involve trade secrets, confidential commercial information, scandalous material, or identity theft risks, and argues that none of which apply here. Diamond claims disclosure could harm their sale efforts, lower employee morale, or allow competitors to poach staff, but the Trustee counters that these concerns are baseless: the sale process concludes before the hearing, and employee mobility is a normal business risk, not a bankruptcy court's concern. Without this information, creditors cannot assess the bonuses' reasonableness or insider involvement, undermining transparency in a process meant to prioritize creditor recovery.

It's all going to come out in the wash….

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