Creditors ask court to convert Fitness Holdings bankruptcy to liquidation; meanwhile, store closing sales begin

Although store closing sales began mid-July on court approval at all remaining Busy Body Home Fitness stores, the bankruptcy court will hear a motion July 28 from creditors that requests the reorganization case be converted to an official liquidation by the court.

The bankruptcy case filed Oct. 20, 2008, by Busy Body’s owner, Fitness Holdings International (FHI), was for reorganization under Chapter 11 of the bankruptcy code. Unsecured creditors, who in late May 2009 filed their own court action against FHI owner Hancock Park and its executives charging fraudulence, requested on July 7 that the U.S. Bankruptcy Court, District of Central California, approve their motion to convert the FHI case to liquidation under Chapter 7. (Click here to see a May 22, 2009, SNEWS® story, “FHI creditors sue owner Hancock Park et al claiming fraudulence prior to bankruptcy, seek $21 million.”)

Despite the FHI bankruptcy being considered a “reorganization” under its Ch. 11 filing, the owner of the specialty retailer asked the court to allow it to liquidate all remaining stores. That request was granted by the court July 14. (Click here to see a July 6, 2009, SNEWS story, “FHI asks bankruptcy court to approve liquidation of all remaining Busy Body stores.”) In the approved motion, FHI said it expected all stores to be closed by the end of July.

In the unsecured creditors’ case against FHI owners and executives, the court documents stated that FHI has been operating “in a controlled liquidation mode” since it filed for reorganization in October 2008, and FHI now proposes to shut down all operations by approximately July 26, 2009. “As of that date, a Chapter 11 bankruptcy (reorganization) case will serve no further material purpose for the debtor and its creditors.”

The litigation by the unsecured creditors’ committee will provide “their only potential recovery in this case,” and the committee stated it must be allowed to continue. A Chapter 7 case could preserve some remaining assets for the benefit of the creditors, the filing stated.

“Conversion, rather than liquidation, is the appropriate relief … given that a significant asset remains unliquidated for the benefit of unsecured creditors who are seeking conversion rather than liquidation,” the documents stated.

“Reorganization of this debtor has never been a prospective outcome in this case,” the documents also stated, “and the complete liquidation of its remaining assets removes all doubt as to whether this debtor holds any prospect of rehabilitation.”

According to the court papers, there remains a possibility still that the debtor could bring a purchaser for some of the retail businesses assets and locations, and the creditors propose the court decide on timing and conversion at the July 28 hearing. The committee added it is also open to hearing alternatives to conversion if they can provide benefit to the creditors.

In a response to the court on July 14, FHI stated that it is still uncertain if all the stores will eventually close since negotiations continue with parties who remain interested in some locations and assets. In addition, the FHI response noted, the secured creditor, Pacific Western Bank, is “substantially undersecured” and will hold a “substantial unpaid claim against the debtor.” FHI said conversion to liquidation is a layer of additional administrative oversight and costs that are not necessary.

In conclusion, it requested the court either deny the motion to convert to liquidation or delay a hearing for 90 days.

In the ongoing litigation by the unsecured creditors committee, Pacific Western Bank, which was originally granted until July 10 by the court to file a response, was granted an extension to respond within 30 days from that date.

–Therese Iknoian