FHI creditors express concerns over proposed sale to insider; FHI’s bank moves to dismiss creditors countersuit

Unsecured creditors in the Fitness Holdings International bankruptcy case have told the court they have concerns about certain issues regarding a proposed sale of remaining assets to a financial insider, although the committee added that it is not in general opposed to the sale.
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Unsecured creditors in the Fitness Holdings International bankruptcy case have told the court they have concerns about certain issues regarding a proposed sale of remaining assets to a financial insider, although the committee added that it is not in general opposed to the sale.

In a court brief filed Aug. 3, the official committee of unsecured creditors told the U.S. Bankruptcy Court, Central District of California, that the sale to bidder Brandon Sugimoto demands more scrutiny since Sugimoto, as FHI’s director of financial analysis since May 2005, is an “insider.”

Sugimoto has proposed to pay $200,000 for all remaining Busy Body assets (click here to see a July 31, 2009, SNEWS® story, “FHI employee is proposed buyer for Busy Body assets”); the court on Aug. 3 set the hearing for the sale on Aug. 11. Other higher bids will now be accepted, and, if others are received, an auction will be held at the Aug. 11 hearing.

Creditors expressed the concern that allowing stores to remain open for an additional three weeks to allow the sale to proceed could create “a new class of administrative creditors – customers who pay for equipment that the debtor does not or cannot purchase from a vendor prior to the closing date of the sale.” The document has asked the court to be sure any sale takes into account such possible liabilities.

In addition, creditors requested that decisions about qualified bidders and prices be made by FHI in consultation with the committee, and asked the court to have money paid in a sale in excess of administrative claims be put into escrow to permit completion of the lawsuit by the unsecured creditors committee that was filed May 21, 2009 (click here to see that May 22, 2009, story “FHI creditors sue owner Hancock Park et al claiming fraudulence prior to bankruptcy, seek $21 million.” That action filed against FHI owner Hancock Park and executives Kenton Van Harten and Michael Fourticq charged the three defendants with a litany of pre-bankruptcy fraudulent transfers, breach of fiduciary duties, and aiding and abetting breach of fiduciary duties.

In that case, which also continues in the same court, FHI’s bank, Pacific Western, filed on July 31 a motion to dismiss the complaint. In that motion for dismissal the bank’s representatives claim a failure by the creditors to state any viable claims.

The committee’s claims are “fatally defective,” the 35-page document stated, “and should be dismissed” with prejudice.

In addition to the pending Aug. 11 hearing, a hearing Sept. 29 will hear a request by the creditors to convert the Ch. 11 bankruptcy reorganization filed by FHI to a Ch. 7 bankruptcy liquidation. Click here to see a July 20, 2009, SNEWS story, “Creditors ask court to convert Fitness Holdings bankruptcy to liquidation; meanwhile, store closing sales begin." A status hearing on the creditors case is also set for Oct. 5.

--Therese Iknoian

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