FHI creditors sue owner Hancock Park et al claiming fraudulence prior to bankruptcy, seek $21 million

After several months of investigating business dealings in the years prior to FHI’s bankruptcy reorganization filing in October 2008, the unsecured creditors committee has filed a suit charging a litany of fraudulent transfers, breach of fiduciary duties, and aiding and abetting breach of fiduciary duties.

Defendants in the case are Hancock Park Capital and Associates, which owns Fitness Holdings International (FHI operated Busy Body Home Fitness and Omni Fitness); Pacific Western Bank, the holder of the loan; Kenton Van Harten, a director and partner with Hancock Park, and COO and president of FHI; and Michael Fourticq, a principal and partner with and the founder of Hancock Park.

According to court papers filed at the end of the day May 21, the committee is seeking to recover $20,881,704 obtained by Hancock Park from FHI that it claims HP obtained through “fraudulent conveyances that occurred as a result of a June 2007 refinancing of (FHI’s) debt obligations.”

The unsecured creditors committee includes Tom Staub, Aerobics Inc., chairman; as well as Dan Tanner, Life Fitness; Jeffrey Patrick, Hoist; and David Nees, Fitness Resource; and John Galasso, representing Kamparts. Staub was chairman of the creditors committee when the first Busy Body went bankrupt in 2001 under the ownership of Rice Capital. Aerobics is owed $1.1 million, Life Fitness $1.3 million, Hoist $637,900, and Kamparts $423,207. In addition, Precor has the third-largest debt of $749,300, with LeMond Fitness just behind that at $702,700.

“We just need to protect ourselves, and we need to get what’s rightly ours — no more, no less,” said Galasso about the suit. “We’re just not sure how big the pie is.”

The adversary case was filed by the committee’s legal counsel, Larry Gabriel, of the firm Jenkins, Mulligan & Gabriel, who was hired by the committee in mid-April after the request was granted by the U.S. Bankruptcy Court, Central Division of California, Los Angeles Division. Bankruptcy law allows the creditors committee to hire counsel and conduct its own research, which is funded by the debtor. The allowance is designed to be a counter-balance to the information presented by the debtor.

In the court approval of the committee legal counsel April 13, the committee had stated it had been conducting its own look at “certain pre-petition transactions” as a part of the Oct. 20, 2008, Chapter 11 bankruptcy reorganization filing.

“The avoidable fraudulent transfers resulted from cash transfers from the debtor to Hancock Park in the amount of $11,995,500.37 as payment against capital loans previously made by Hancock Park to the debtor, and the release of $8,886,204.40 in guarantees that Hancock Park had provided to support the debtor’s Pacific Western Bank loan obligations,” the court filing summarized about the mid-2007 actions.

“At the time of the refinancing, the debtor was operating within the zone of insolvency,” the case stated.

The filing claimed that the defendants Hancock Park and the debtor’s directors, Van Harten and Fourticq, breached their fiduciary duties in completing the refinancing.

With this, the complaint seeks to place the claims of unsecured creditors ahead of those of Hancock Park, as well as a declaration about the amount of the bank’s secured claim, and damages from the bank arising from “Pacific Western Bank aiding and abetting the breaches of fiduciary duty” by the defendants.

Galasso, an independent sales rep whose clients include Kamparts, told SNEWS® the suit should help clarify “what is truly a secured creditor and what is truly unsecured.”

“It’s not a lawsuit to hurt anybody,” he added. “I’d rather have a 23- or 30-store chain that’s nice and healthy than have it gone. That doesn’t help anybody.”

According to the court papers, by June 2007, Hancock Park had invested advances of $17 million to the debtor to fund expansion and operations. At the same time, FHI refinanced its secured loan with Pacific Western Bank by borrowing $25 million from the bank in a secured term loan ($17 million) and a secured line of credit ($8 million). In connection with the refinancing, the bank disbursed money to the bank, to Hancock Park and to FHI.

“PWBank knew at the time that it advanced and disbursed the new secured financing that it was transferring $11,995,500.37 to Hancock Park on account of an alleged debt that, at best, was unsecured debt,” the filing stated. “PWBank also knew that the refinancing would release Hancock Park from guarantees of the PWBank secured loan. The new secured financing did not require guarantees from Hancock Park….

“As a result of the new secured financing and the Hancock Transfer, the debtor was rendered insolvent,” the filing said.

The suit is asking for recovery of the fraudulent transfers and damages.

No hearings had been set on the case as of May 22. Meanwhile, the court on May 13 had approved a delay of the hearing on FHI’s reorganization plan to July 28 based on the debtor stating it had a possible sale of as many of the 23 remaining stores. FHI since it filed for bankruptcy seven months ago has closed approximately 85 stores. The filing stated that negotiations are continuing and it expected to present the agreement to the court “in the near future.”

–Therese Iknoian