FHI’s bankruptcy reorganization converted to liquidation

More than eight months after FHI and its Busy Body and Omni retail stores liquidated, the bankruptcy court in the 18-month-old case has converted the reorganization case. Creditors remain hopeful, SNEWS was told.

In what is considered a court procedural action, the U.S. Bankruptcy Court, District of Central California, has converted the Chapter 11 bankruptcy reorganization case of Fitness Holdings International to a Chapter 7 bankruptcy liquidation.

The approval by the court April 15 was done upon request of the court-appointed trustee for the case who asked the court to either dismiss it or convert it to a liquidation case. That Feb. 25 request came because FHI has not filed monthly operating reports required in bankruptcy cases since January 2010 for the case that was originally filed in October 2008. The company has also not paid monthly or quarterly fees since late 2009, the trustee stated. The order approving the conversion requires payment of outstanding fees.

Although FHI basically liquidated its remaining retail operations in August 2009 (click here to see an Aug. 12, 2009, SNEWS® story, “The Gym Store LLC highest bidder for FHI/Busy Body assets, plans 8-10 SoCal stores”), the creditors committee opposed in a court filing March 23 the trustee’s request for the conversion.

The creditors’ committee has continued to pursue recovery of millions of dollars it says FHI attained fraudulently. See a May 22, 2009, SNEWS story, “FHI creditors sue owner Hancock Park et al claiming fraudulence prior to bankruptcy, seek $21 million.” With the conversion of the case to liquidation status, the creditors’ committee will be disbanded, said Tom Staub, PaceMaster president, who was chairman of the committee.

“Any further recovery action will be governed by the trustee,” he said. He told SNEWS he is unsure what the chances of recovery of money are at this point because it will depend on the trustee.

According to the creditors’ court filing from March 23, the committee was not so much opposed to the conversion but allowing the case to remain a reorganization matter as the “best option” for recovering money. The committee stated that two of FHI’s former employees are continuing to collect tax refunds, a payment owned by Wells Fargo Bank, and other claims “that are estimated to total to the mid-six-figures.”

“Keeping the debtor in Chapter 11 (reorganization) may provide the best means to allow these … paths to proceed for the benefit of creditors,” the committee stated in the filing.

“It would send,” the committee continued, “a dangerous message to future debtors if insiders could obtain a complete release of litigation against themselves simply by failing to comply with U.S. trustee reporting guidelines.”

–Therese Iknoian