The Fitness Experience: Still in non-compliance with court

With a status hearing on property scheduled for May 13, the Ch. 7 liquidation bankruptcy of The Fitness Experience may be looking at a dismissal by the court since most of the court-mandated schedules have not been filed and likely won’t be.

Originally due on Feb. 5 after the Jan. 21 filing (See SNEWS® story, Jan. 24, 2005, “Financial woes force The Fitness Experience into Ch. 7”), the schedules and “statement of affairs” are documents that list creditors, assets, liabilities and other information the court needs to properly dispense the case. The court has twice delayed a hearing and a meeting of creditors, both of which have not occurred. Judge John Squires of the U.S. Bankruptcy Court, Northern District of Illinois, Chicago, has also issued warnings to TFE to comply with the court and administering trustee. (See SNEWS® story, March 7, 2005, “Bankruptcy update.”)

Legal views and court docs
SNEWS® took an in-depth look at court documents, including ones from TFE attorneys requesting withdrawal from the case due to non-cooperation and non-payment by the client, and found the case has been stringing along, with a parade before the court on property, automobiles and bank account issues, but no resolution and no further responses from TFE.

Court trustees and attorneys and TFE attorneys did not return several calls by SNEWS® to clarify the case’s status. However, a SNEWS® legal source and former bankruptcy law professor said courts will normally dismiss a case like this within about five or six months if the debtor fails to file the necessary paperwork.

“The reality is, if you don’t have anything, you don’t have anything,” the source told SNEWS®, saying that at some point the court has to throw up its hands and say, “‘No harm, no foul’ … You’re not following the rules. We’re done.”

He added that non-compliance is not uncommon in Ch. 7 cases where business owners may look at it as a way to “dump the carcass” at the door of the court and run. The filing does protect a business from lawsuits while it’s in the court. And, after the case is dismissed, the business and its owners, if they co-signed on contracts, are again opened up to the threat of lawsuits — although if no money exists, there may be no reason to bother.

Compared to just shuttering its doors in the dark of night and doing a midnight dash, the Ch. 7 filing allows for a more orderly liquidation and stops creditors from trying to collect, the source said.

TFE attorneys bailed
Even the attorneys for The Fitness Experience had requested Judge Squires formally remove them from the case due to non-payment despite the agreement by TFE to pay for services. That request was approved April 29 and is the last court action as of May 9.

In that request by the legal firm of Schwartz, Cooper, Greenberger & Krauss, the firm stated it had been hired on Dec. 10, 2004, to carry out legal services for TFE, including helping the company decide if it should liquidate out-of-court or in-court, or file a Ch. 11 reorganization. The Schwartz Cooper firm had prepared Ch. 11 papers for TFE when, on Jan. 20, the company decided to immediately cease operations and file Ch. 7 liquidation.

Schwartz Cooper said it informed TFE’s CFO James Mittlestaedt of the requirements of Ch. 7 after the Jan. 21 filing. Mittlestaedt then changed jobs. When the legal firm then tried to contact former TFE President Doug Pearson and former TFE Vice President Rich Rot, they both declined to prepare the required documents. Pearson allegedly said he did not have the computer knowledge to operate and find the data, and Rot said his attorney had advised him not to talk to anybody about the case. Co-owner Phil Singer could not be located, the legal firm stated, but Pearson allegedly said Singer too did not have the computer knowledge to supply the information.

Schwartz Cooper then concluded that no one was able to complete the required schedules and, according to its court filing, therefore filed for a notice to withdraw from the case since its client didn’t cooperate or communicate.

SNEWS® View: You can’t wring water from a turnip. Since all scurried from the sinking TFE ship, we assume the court in the next 30 days or so will simply dismiss the case. Although in the past some suppliers have talked of legal action, we’re not sure how much can be had if the well is dry. This will probably just end up as another sour apple in the fitness industry’s basket.