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Levine Files Complaint in Diamond Bankruptcy Case; Alleges "Levine Guaranty" No Longer Enforceable

Ken Levine, Diamond's largest shareholder and former co-chairperson of the company, has filed a complaint against Guggenheim Corporate Funding LLC, Diamond's senior secured lender in its bankruptcy case. In the complaint, Levine alleges that "the Levine Guaranty," under which he committed to guaranty up to $6 million(later increased to $10 million) of Guggenheim's original loan, has been released and rendered unenforceable as of November 7, 2007, due to Guggenheim's actions, and that his obligations under the aforementioned agreement are satisfied once Diamond repays its original $35 million pre-petition indebtedness.

According to the complaint, filed today in the U.S. Bankruptcy Court for the District of Delaware as part of the Diamond bankruptcy case, Levine claims that in November 2007, Guggenheim and Diamond increased Diamond's debt to the former by $10 million-from $35 million to $45 million without obtaining Levine's consent as guarantor.

"Specifically, in January 2007, Guggenheim agreed to act as agent to a group of lenders (the "Lenders") who in turn agreed to make available loans of up to $35 million to the Debtors," reads the complaint. "Mr. Levine, who is the Debtor's principal stockholder (and at the time was also CEO), agreed to guaranty up to $6 million (later increased to $10 million) of the up to $35 million loan."

It continues, "It was all parties' intent that Mr. Levine would guaranty a portion of a maximum $35 million loan. But on November 7, 2007, several weeks after Mr. Levine stepped down as CEO, Guggenheim and the Debtors amended the Credit Agreement to provide for an additional loan of approximately $10 million. Mr. Levine, as guarantor of the original $35 million obligation under the Credit Agreement, never consented to this additional loan. Indeed, Guggenheim sought his consent and Mr. Levine refused. Yet Guggenheim and the Lenders loaned the money anyway and now contend that, by the amendment to the Credit Agreement (to which Mr. Levine is not a party), Mr. Levine became responsible to guaranty up to $10 million if the Debtors default on a now significantly (29 percent) larger loan."

Levine is asking that the court "clarify the parties' rights and prevent Guggenheim and [Diamond] from unilaterally increasing his risks under the Levine Guaranty."

CLICK HERE for full text of complaint.

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