Leisure's petitioning creditors ask court to deny motion to dismiss, claim "bitter recriminations"

The three original petitioning creditors, plus two additional ones who joined the involuntary Chapter 7 bankruptcy filing against Leisure Fitness, have asked the court to deny the retailer's motion to dismiss the case, noting the company is insolvent.
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The three original petitioning creditors, plus two additional ones who joined the involuntary Chapter 7 bankruptcy filing against Leisure Fitness, have asked the court to deny the retailer's motion to dismiss the case, noting the company is insolvent.

In the papers filed Oct. 16 prior to an Oct. 23 hearing on the case, petitioners said, "Leisure relies wholly on bald recriminations that the involuntary petition is irreparably tainted and beyond salvation...."

In addition, original petitioners Eric DePaul, James Sutcliffe and InFlight Fitness -- joined in the case Sept. 23 by commercial suppliers Pro-Elite and Atlantis (claiming debts of $13,352.61 and $102,695.75, respectively) -- told the U.S. Bankruptcy Court, Delaware, in the documents that claims by Leisure about the reasons behind the original filing are "bitter recriminations asserted without any basis in fact." (Click here to see an Oct. 6 SNEWS® story, "Leisure Fitness moves to dismiss involuntary Ch. 7 -- claims 'bad faith,' attempt to take over company.")

"There is no evidence of effort by DePaul, Sutcliffe and InFlight to gain undue influence over Leisure," the documents stated. "On the contrary, the bankruptcy filing has left unsecured creditors with little influence over Leisure and its assets, as WTC (Wilmington Trust Company, Leisure's bank and lender) has asserted a lien on substantially all of Leisure's assets."

The papers filed note that although DePaul while employed at Leisure did participate with Matt Torggler in negotiations to purchase Leisure's commercial division, DePaul left Leisure on good terms. "There is no credible evidence in the record to demonstrate that DePaul participated in the filing of the involuntary petition to obtain an advantage over other creditors or for the purpose of gaining control over Leisure's assets," court papers noted.

DePaul told SNEWS, when reached by telephone, "I don't have any comment until after our case is heard." Others involved in the case as well as employees have also been told not to discuss it, SNEWS was told, or have declined comment to SNEWS.

The doors of the 19-store, 13-year-old chain based in Newark, Del., were shut suddenly Sept. 19 when owners could not meet payroll or other bills that were mounting after the three filed their petition with the court Sept. 9. (Click here to see that SNEWS story.)

Although the original involuntary Chapter 7 filing by DePaul, Sutcliffe and InFlight claim total money due to the three of just $26,900, Leisure Fitness had increasing financial woes, per a court filing by WTC on Sept. 19. In that document, WTC stated Leisure owed it an amount equal to nearly $6.3 million, but noted that its collateral was at that time worth less than $3 million. The bank has asked the court to obtain a judgment and to foreclose and to allow it to sell the collateral so the proceeds can be applied to the amount due.

In court affidavits from Leisure Fitness President Katina Geralis and accepted by the court Oct. 1, she had stated the filing was "for the improper purpose of attempting to gain control over the assets of Leisure Fitness at liquidation value." She also stated that amounts owed were in dispute; however, the petitioners' response have noted there is no dispute and that "Leisure has repeatedly acknowledged" the amounts owed to each. Geralis also denied owing millions of dollars to the bank: "They looked at every financial statement I gave them."

In a July 14, 2008, email filed with the court from Emmanuel Fournaris, then-counsel for Leisure Fitness, to DePaul's then-lawyer Joseph Grey it was noted by Fournaris that he had been "notified by WTC that Leisure is now in default under its loan documentation with WTC," adding that the company had about $6.6 million of debt, so petitioners knew "Leisure's business was deteriorating," the filing noted.

"Even if DePaul had an interest in acquiring assets of Leisure, the filing of an involuntary petition would provide nothing less than an open, transparent and court-supervised process for the liquidation of assets," the document stated, since bidding would be public and petitioners would not receive any advantage over other bidders.

"The petitioning creditors believe that bankruptcy remains the only venue for all unsecured creditors to scrutinize Leisure and recover anything on claims," the filing concluded. Petitioners stated they believe that Leisure's motion to dismiss "is a self-serving attempt to avoid scrutiny of this court and a trustee."

SNEWS® View: No matter what the numbers say, an awful lot of bad blood has been gushing on both sides of this case -- claims are being tossed back and forth, allegations being forwarded, and rumors started. Both sides are taking part, and none of the action is good for the industry as a whole at a time when the industry is reeling from the economy's downturn. One must wonder why the smaller suppliers to Leisure are the ones pushing the buttons in the involuntary case; we have noted that they are all commercial suppliers that had little or nothing to do with the retail stores. Leisure -- one of Precor's largest in the past, for example, with about half of its business done with Precor -- has a number of other suppliers who must be owed a lot more than even Atlantis' $102,695, the largest sum claimed as due of the five creditors in the case that now has total claims of some $134,430. There is a lot more to this story that hasn't been printed -- and SNEWS won't yet print -- because nobody will stand behind their claims by speaking on the record … or at all. Since we won't reprint allegations or rumors without proof, we won't use another story or online news as needed proof, and we won't print claims passed to us second-hand, gaps exist in the story that need to be closed.

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