The ugly public brawl between

Liberty Media's

( LCAPA) John Malone and



Barry Diller is boiling to new levels.

On Tuesday, IAC issued a statement denouncing court filings by Liberty to oust IAC Chairman Diller, along with several other board members, as "preposterous."

"I am beginning to think these people are insane," Diller said in a statement.

Liberty has accused Diller and the board members -- including Diller's wife, Diane Von Furstenberg, Edgar Bronfman Jr., Victor Kaufman, Arthur Martinez, Steven Rattner and Alan Spoon -- with violating their fiduciary duty. The accusation comes as IAC plans to spin off four of its business units in a move that would dilute Liberty's voting control over IAC's operations.

While Liberty enjoys a 62% voting control in IAC, it owns only about 30% of the conglomerate.

Theatrics aside, the high-profile dispute will create yet more uncertainty for the beleaguered IACI, which has seen its shares tumble roughly 35% in the last year as its signature Home Shopping Network and Lending Tree divisions struggle with increasingly frugal consumers and the mortgage market slump.

On Tuesday, IAC was up nearly 2% to $25.65

After much soul-searching, Diller announced in November an ambitious plan to dramatically restructure IAC. The new entity was supposed to be much more closely tied to the fate of the fast-growing Internet ad market and easer for investors to understand.

But the latest round of legal wrangling cast doubt into whether the spinoff can go forward as planned. "Pending the resolution of the above legal dispute, these spinoff plans may be stayed," Citigroup analyst Mark Mahaney wrote in a research note Tuesday.

Citigroup makes a market in IAC shares.

Until then, IAC will remain encumbered with many of its slower-performing units. Worse still, IAC is in the unenviable position of having wide exposure to the slowing U.S. economy.

Citigroup's Mahaney says that only 13% of IAC's revenue comes from overseas. "We see few countercyclical hedges to protect against a potentially material economic slowdown in the US," he wrote.

It's not just the bad blood that Diller has to worry about. It's a bad headache, given the road ahead for IAC.