Leisure Fitness moves to dismiss involuntary Ch. 7 — claims “bad faith,” attempt to take over company

Leisure Fitness’ attorneys have asked the U.S. Bankruptcy Court, Delaware, to dismiss the involuntary Chapter 7 bankruptcy liquidation filed against it in mid-September, claiming it is “not well-founded” and in “bad faith.”

In the motion accepted at an Oct. 1 hearing, Leisure Fitness attorneys noted information that calls into question whether the case, filed over a total of $26,900, was “for the improper purpose of attempting to gain control over the assets of Leisure Fitness at liquidation value.”

U.S. Code Section 303(b) states that an involuntary petition may be commenced by a group of at least three creditors who hold unsecured claims which total at least $10,000. Although the amounts remain in dispute, two former employees John Sutcliffe and James E. DePaul, and a supplier, InFlight Fitness, joined together for the filing, with Sutcliffe’s claim totaling $3,000, DePaul’s for $18,400 and InFlight’s for $5,500.

“The involuntary petition had a devastating effect on Leisure Fitness,” owner Katina Geralis said in a statement accepted by the court Oct. 1. The company’s bank, Wilmington Trust, panicked and suspended all activity on Leisure’s revolving line of credit and froze its assets, although Geralis told SNEWS® she went personally to the bank’s offices on Sept. 18 to talk to the executives. Without a line of credit, Geralis couldn’t make payroll on Sept. 18 and was forced without notice to shut the company’s doors on Sept. 19. So sudden was the closure that Paul Goldberg of GoFit had flown in for a sales meeting on Sept. 23, taking a 6 a.m. flight from Chicago and told SNEWS he was sitting in his rental car at the airport when he called his contact to confirm at which store they would meet. The contact informed him that the stores were closed.

“That’s the first time that’s happened to me,” Goldberg said, who at first thought it was a bad joke before he settled in at the airport for the day until he could get a flight back out.

According to U.S. law, once an involuntary Chapter 7 is filed, a company either can convert to regular Chapter 7 and liquidate or, if certain terms are met, can convert to Chapter 11 reorganization.

Geralis told SNEWS that resurrecting the 19-store, 13-year-old business at this point would be too difficult with the damage that has been done because of disgruntled customers, sales time lost at an inopportune season, unfavorable local news stories, a scattered employee team, and lost momentum.

A trustee was assigned to the case by the court Sept. 30, and a hearing is set for Oct. 23 at 10 a.m. at the court in Wilmington, Del., to decide the fate of the case and of Leisure Fitnesss; however, Geralis told SNEWS for a Sept. 26 story that there is proof the three who joined forces in the filing had “malicious intent” to put Leisure out of business.

In Leisure’s motion to dismiss the Sept. 9 involuntary filing, the company stated that only one of the three creditors satisfied court requirements for such a filing. The papers stated that only InFlight Fitness, which did occasional commercial business with Leisure’s commercial division, had a debt incurred in the ordinary course of business with the correct parameters fulfilled. In the case of InFlight, Leisure acknowledged an unpaid May 8, 2008, invoice of $5,572.

Sutcliffe and DePaul worked for the company’s commercial division. Sutcliffe submitted a resignation letter May 6, signed by himself and Geralis, listing amounts owed him, which Geralis stated had been paid, although there is some question about $1,144.85 in vested benefits, per the court filings. The amount of DePaul’s claim is disputed by Leisure; he also left the company in the spring but the company did not receive a resignation letter. Both have two-year non-competes in effect that were signed upon their hire.

The story gets more complicated, however, based on what is told in the court papers: Both had worked with Matt Torggler in the company’s commercial division and DePaul, after his resignation, had gone to work for Torggler at Torggler’s new company called enerG Wellness. Geralis and Torggler had been negotiating for Torggler to buy the commercial division, with assets to be acquired by enerG, which was allegedly formed to acquire those assets. The deal failed in the spring when Torggler per a court statement filed by Geralis failed to come up with the agreed financing to close the transaction. The original price was to be nearly $3.5 million, per Geralis’ statement to the court, but a revised offer submitted in late April noted an offer of $890,000.

In an additional wrinkle, Geralis received an email immediately after the company closed its doors from a business services provider stating he had received “a funny phone call” in early September from somebody who wanted to know if his company was owed money by Leisure. “If so,” the email related, “then I was to call and be part of a conference communication so as to force bankruptcy.” The provider said he told the caller he was always paid promptly, then added in the email, “When you were growing everyone thought you were the greatest and now where are all your friends?”

Geralis doesn’t dispute the fact in talking to SNEWS that she, like other retailers, are working hard to stay afloat in today’s tight economy but she said the company was “making it happen.” Although rumors exist that employee benefits had not paid, Geralis stated that all health, retirement, payroll and other contracted benefits were paid through August.

For Leisure the struggle began partly when one of its suppliers Precor, which made up about 50 percent of its retail and commercial business, in September 2007, suddenly pulled from her the rights to area sales for clubs and YMCAs. That segment made up a majority of her commercial sales.

Wilmington Trust has filed for relief from stay, which Leisure opposes based on what it called an improper involuntary filing. Leisure is asking the court to dismiss the involuntary petition and seeks damages and costs from Sutcliffe and DePaul if claims are substantiated.

Leisure is the second large fitness specialty retailer this year to shut its doors; Total Fitness, based in Connecticut and where Precor equipment made up more than two-thirds of its business, shuttered its nine doors suddenly on May 25 (click here to see that May 29, 2008, story), about nine months after it lost its ability to represent Precor in the area.

SNEWS® View: Ripples are running strong beneath the surface of this incident. This entire case has become personal and quite convoluted. Nasty accusations and insults and rumors are being tossed about like so much confetti at a gala parade — except this is anything but a good time or good thing. Basically, good people have lost jobs, consumers have been burned by the industry, the specialty fitness industry gained a lot of bad press, consumers may remain skeptical of specialty stores, and a chain of quality stores has been lost. Why? Because of an alleged unpaid bill of not even $27,000. Granted, with the current economy, we know Leisure was — just like other retailers are — often running a bit later than normal on paying suppliers and vendors. But in today’s world putting a store out of business was not the smartest move for anyone in any part of the retail food chain. The repercussions are huge and are simply not good for the industry. In these times helping each other stay afloat, operating within appropriate means, thinking partnerships and cooperative relationships, and trying to think outside the box are all ways to survive. No matter what side of the fence you stand on, the loss of Leisure is one that should be mourned — and one that may come back to bite.