The lawsuit alleges that the defendants intentionally concealed the fact that the distribution contract between Alliance Game Distributors and Wizards of the Coast was ending until after the Asset Purchase Agreement was signed and approved by the court. The impact would be roughly 25% of Alliance Game Distributors' sales, or $39.88 million out of $161.3 million, the lawsuit alleges.
On April 17, eight days before the deal was to close, Diamond disclosed to Alliance Entertainment that the agreement with Wizards of the Coast would expire on April 30, and would not be renewed. Alliance Game Distributors executives and other Diamond representatives contended that the termination of the agreement was a surprise.
The jig was up, according to the complaint, on April 21, when a video conference was held between Alliance Entertainment, Wizards of the Coast, and representatives of Diamond Comic Distributors, including Tyson, Hirsch, and Gorin. In that conference, WotC President John Hight and Vice President of Global Revenue and Wizards Play Network Brian Trunk explained that WotC had decided in December of 2024 to terminate the distribution agreement because sales to Alliance Game Distributors had declined by over 8% over the previous four years, during a time of increasing sales overall, the complaint alleged. Extensions were granted through April 30 to assist in the bankruptcy case "…and to induce the Debtors to grant WotC critical vendor status," the filing alleged.
Efforts were made to salvage the deal, according to the filing. Alliance Entertainment made a proposal to Wizards of the Coast with inducements to continue selling to them after the sale, but they declined. There were also some discussions between Alliance Entertainment and Diamond about a reduction in price due to the change in the value of the company, but those did not progress and Alliance Entertainment terminated its Asset Purchase Agreement last Thursday (see "Alliance Terminates").
Alliance Entertainment asserts in the filing that it "…remains ready, willing, and able to close the purchase of the Debtors' assets at a reduced valuation… to reflect the loss of revenue represented by the terminated WotC Distribution Agreement."
The complaint has five causes of action, including breach of contract against the Diamond companies; fraud, against the Diamond companies, restructuring consultants, and Tyson and Hirsch; aiding and abetting fraud, against Raymond James, the restructuring consultants, and Tyson and Hirsch; negligent misrepresentation, against the Diamond companies, restructuring consultants, and Tyson and Hirsch; and breach of implied covenant of good faith and fair dealing, against the Diamond companies.
The complaint requests a judgment ordering the return of Alliance Entertainment's $8.5 million earnest money deposit; that Raymond James, Getzler Henrich, and Gorin disgorge all fees paid them since the petition date; and that damages and fees be awarded in an amount to be determined.
Meanwhile, even as the trustee moved to convert the bankruptcy from a Chapter 11 reorganization to a Chapter 7 liquidation today, Diamond announced that it was proceeding with a sale to another buyer (see "Trustee Moves, as Diamond Announces"), presumably via the back-up bid by Universal Distribution and Ad Populum (see "Back-up Bid").
Diamond had previously tried to switch the acquirer after the auction, which led to the first lawsuit by Alliance Entertainment (see "Alliance Sues") and a quick reversal, reinstating Alliance as the acquirer.
Not only is the situation in bankruptcy court deteriorating, with more obstacles to a closing, delays, a major dispute, and associated expenses and fees, it also appears that the condition of the business is decaying, with growing accounts payable in addition to the departure of key vendors.
In its complaint, Alliance Entertainment said it had expressed concerns about the condition of the company in an April 23 meeting. "AENT also raised the fact that, after the Petition Date, the Debtors' accounts payables had increased by approximately $16 million and inquired as to the Debtors' plan for these increasing account payables and how the Debtors intended to pay them." The meeting was adjourned without an answer to that question.
