The Chapter 11 reorganization period for Diamond Comic Distributors has come to a close and final fee applications are due soon, but over $833,000 in additional fees have been billed in the run-up to the conversion to Chapter 7 liquidation, which occurred on December 29. Final bills for professional fees during the Chapter 11 period are due within 30 days of the Chapter 7 conversion.
Diamond attorneys Saul Ewing LLP had the largest bills for November and December, totaling $428,272, as Diamond litigates against its former consignment vendors in an effort to seize and sell the consignment inventory that Diamond was storing at the time of the Chapter 11 filing, and Diamond defends against litigation alleging fraud by Alliance Entertainment.
Restructuring consultants Getzler, Henrich & Associates LLC billed $376,162 for the two-month period. Much smaller amounts were billed by Unsecured Creditor Committee attorneys Tydings & Rosenberg LLP and Lowenstein Sandler LLP, which billed $29,110 combined for November (their December bills have not yet been submitted).
Diamond advisors billed nearly $900,000 for October services (see “Diamond Advisors Bill Another $900K”). Total fees during the Chapter 11 period now stand at around $17.4 million.
When a Chapter 11 bankruptcy is converted to Chapter 7, the claims priority of the Chapter 11 professionals falls behind the Chapter 7 trustee and the professionals hired by the trustee. If there is enough cash to pay all professional fees, they are all paid before other claims. If there is not, after Chapter 7 expenses are paid, unpaid Chapter 11 fees are grouped with other administrative claims (such as bills for goods shipped during the Chapter 11 period) and all are paid on a pro-rata basis. Courts have sometimes required professionals to disgorge fees paid during the Chapter 11 period so that all administrative claims receive the same percentage of their claims, but in other cases have allowed professionals to keep all the fees paid up to the Chapter 7 conversion.
Only after administrative claims for bills incurred during the Chapter 11 period are paid will a distribution be made to creditors owed money when the Chapter 11 bankruptcy was filed, an outcome that seems increasingly remote.
Source: ICV2
