Creditor Sues Levine for Allegedly Delaying Diamond's Chapter 11 Filing

Plainfield Special Situations Master Fund Ltd., a creditor of Diamond Glass, has filed a complaint against Ken Levine, former chief executive officer of Diamond Glass and the company's largest shareholder, for allegedly delaying the company's bankruptcy filing in an effort to preserve $10 million he invested in the company.

The complaint, filed in the U.S. Bankruptcy Court for the District of Delaware on Friday, September 5, alleges that Levine had originally contributed $6 million in equity to Diamond in January 2007, as part of the agreement with Guggenheim. The agreement also made it possible for Guggenheim to provide commitments for up to a $20 million term loan and a $15 million revolving line of credit; it also granted Guggenheim a lien on Diamond's assets.

In late April and early May 2007, Diamond requested that Guggenheim "relax the liquidity requirements contained in the Credit Agreement, thereby allowing the Debtors to borrow more money without increasing their total debt commitment under the Credit Agreement." According to court documents, Guggenheim agreed to do so only if Levine would "increase his equity stake … by making another $4 million capital contribution."

In July 2007, Guggenheim issued a notice of default to Diamond, "stating that the Debtors had breached a covenant regarding [their] cumulative earnings."

According to the complaint, as a result of the default on the Guggenheim loan, the company could have at any time collected Levine's $10 million contribution-but did not, and continued financing the company, despite the default.

Though Levine resigned from his post as chairman of the Board of Directors and chief executive officer of the company in October 2007 (CLICK HERE for related story), Levine remained on the company's three-person Board. In December 2007, Levine met with fellow directors Bill Cogswell, who was then president of the company, and Myron Levine, Ken Levine's father. The three at that time passed a resolution authorizing filing for bankruptcy protection, according to the complaint, but delayed filing until April 1, 2008, "in order to protect Levine and his Capital Contribution."

According to Plainfield, had Diamond filed for bankruptcy within 90 days of the decision to do so, Guggenheim could have been classified as an unsecured creditor. Likewise, the company alleges that despite his possible concern for Guggenheim, "Levine was primarily motivated by self-interest, since the Debtors' decision to delay filing for bankruptcy protection until after the 90-day period greatly improved his changes of recovering his $10 million capital investment."

In June 2008, Levine filed a claim for more than $10 million (the amount of his contribution plus interest) against the Diamond estate, claiming rights as a "secured creditor," according to the complaint.

Via the complaint, Plainfield both objects to the filing of Levine's claim and "seeks to have the claims re-characterized as equity." The company also requests that Levine's claim be disallowed, "because they reflect not claims of a creditor, but equity interests in the Debtors." As an alternative, the plaintiff requests that if Levine's claims are not recharacterized as equity, that the claims should be "equitably subordinated to the claims of all unsecured creditors."

"The complaint completely lacks any merit whatsoever and we will vigorously defend [our client]," says Russell C. Silberglied of Richards Layton & Finger, which represents Levine.

Robert J. Dehney, who represents Plainfield and is with the firm of Morris, Nichols, Arsht & Tunnell LLP, was not available for comment.

CLICK HERE for full text of complaint.

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