10:57 AM: We’re in the courtroom of federal bankruptcy judge Karen Overstreet downtown, where she has just announced she will approve the sale of West Seattle’s Allstar Fitness to Sam Adams – after a long and rambling hearing – in which she also said she will ask the US Attorney’s Office to investigate current club owner Bob Padgett for not notifying members of bankruptcy when filed last August, among other things. We’ve been tweeting live; details to come here.
11:19 AM: The hearing has ended. The judge expressed ongoing concern for members getting notice, from hereon out, about their rights, including those whose contracts don’t wind up being assumed by the new ownership, and their rights to file a claim in the Chapter 11 case. She asked the bankruptcy trustee to look into a way to point members to a court website where they could read documents and notices. Trustee Richard Hooper also promised the judge that he will be posting a notice at the club this afternoon to notify members of the sale. We will expand this coverage with play-by-play from the hearing as soon as we’re back at HQ.
ADDED 6:21 PM: The rest of today’s story – through the end of the court hearing, anyway (we’re interested in hearing from anyone who might have seen the new owner at the club today, and/or the promised notice to members – your comments and/or e-mail are appreciated):
Key players, on and facing the bench on the 7th floor of the federal courthouse downtown:
U.S. District Court Judge Karen Overstreet
Representing the court-appointed trustee, Yousef Arefi-Afshar
Representing the would-be buyer (she said she had “just been retained”)
Representing the club’s landlord
Trustee Richard Hooper
Those in the gallery, as mentioned from the bench, and/or as seen on the witness stand, included:
More than half a dozen people who raised their hands to identify themselves as club members
Sam Adams (mentioned as being there somewhere – though we didn’t see him)
*Note that cameras are not allowed in federal courtrooms; otherwise we would have shot video or at least photos.*
First item of discussion: Errors in documents, particularly the August 2013 date listed as the cutoff for certain contracts being honored – “We don’t believe anyone’s due process has been violated,” says the trustee’s lawyer – and the apparent errors in listing who was supposed to be on the “rejected contracts” list. The lawyer says “lemonade” resulted because it led them to realize the debtor’s records (debtor refers to Allstar ownership) “contained further errors.”
Judge Overstreet got the lawyer to acknowledge that the “rejected contracts” list would be vetted ultimately by date, not necessarily by names on what is now acknowledged to be a list contianing errors.
One hangup, though: The debtor reportedly solicited renewals before filing for Chapter 11, even though the contracts didn’t expire until afterward. One person on this list is in the courtroom. Those are on the rejected contract list, even though they wouldn’t have been if they had waited to pay until the actual expiration date.
Once that was all somewhat straightened out, it came to the matter of the terms of the sale, and the judge being convinced whether to approve it or not.
This is where dollar-sign specifics started coming in.
The landlord’s lawyer said his client was owed about half a million dollars by current club ownership – including three months without rent being paid, at $135,000 a month. The lawyer reiterated their interest in a “viable tenant.” To a suggestion that the sale would benefit no one but the landlord, he countered that the remaining members would benefit by “having a facility they can go to, with the buyer upgrading it … I presume the membership lives in West Seattle – there’s apparently a major fitness club going in, but it’s going to be a while.” (That was presumably a reference to LA Fitness, the health-club chain that will be the anchor tenant for Spruce, the development set for “The Hole,” expected to start construction sometime soon – its developer hasn’t answered our recent queries.)
Judge Overstreet, who presided snappily throughout with occasional wit, said, “And the alternative is, I say no, and we close the club.”
That was reiterated throughout – this deal may not be great for all the current members, but, the contention was, it beat closing the club and leaving all members with nowhere to go. Also reiterated by the judge – she had asked Allstar owner Bob Padgett at the time of the filing last summer to “give notice to all members of this club that bankruptcy had been filed – he did not.”
(The case was filed on August 27th. We didn’t learn about it until October, at which time we published this story, quoting club management as saying a letter would be sent to members.)
The lack of notice was cited as a reason why GRE 509 Olive LLC, a downtown interest with some involvement with both the debtor and Adams, in separate transactions, weighed in at the last minute before the hearing on the prospective sale. Their lawyer said that some issues mattered more to them than others, but overall, “I don’t want it said in two months that we hid in the weeds and didn’t say anything.” The trustee’s lawyer Arefi-Afshar said he considered that company’s claims a “red herring.” At that point, the 509 Olive also brought up another issue from their filing, whether Adams can live up to his promises regarding renovating and operating the West Seattle club.
“He’s here and he can testify,” offered the trustee’s side.
The judge did not take them up on that offer. She did grill Hooper on how the $75,000 purchase price for club assets “squares with the valuation.” Hooper said it was the best they could do, and that they needed to do something fast – “we barely have the cash to keep the doors open and pay the salaries.”
That’s when several members took the opportunity to testify. The first took issue with Arefi-Afshar’s characterization of the erroneous list/date turning “lemons into lemonade” – in her view, the notice and its errors “cut off further interest” for too many people who didn’t “believe their rights are affected.”
“But more (contracts) will be honored” than originally believed, the judge countered, subsequently saying again that she is not pleased outgoing owner Padgett didn’t notify members, describing herself even as being in “a snit.”
The testifying member said she had belonged to the club since the start and thinks it’s undervalued with a $75,000 sale price, suggesting there were members who might have offered at least that much, but hadn’t heard about a search for a buyer. She quoted Adams’s March 10th WSB interview in which he said he expected to honor 99 percent of even the contracts listed as “rejected” in the court documents, and she thought the documents should be revised to explicitly say that.
The next member to speak was one of the “investors” from whom the debtor had allegedly solicited “investments,” with part of the sum ostensibly to go toward lifetime/long-term memberships. His contract, he said, is supposed to go through September 2018, and he considers it “disgraceful” that he didn’t get much notice. “I want him to honor the people who have supported the club.”
The next person to speak also described herself as upset about the lack of notice: “If I knew they were in bankruptcy, I would never have signed a long-term contract.” She said she hadn’t heard about it until late February. She thought a folder of documents about the case at the club’s front desk would have been helpful. Would an accurate list of affected members be available? she wondered. Trustee Hooper said “the accuracy of the records at the club is questionable,” and noted that the 7,000-plus people described as members are actually “everybody on the register of the club,” including some “inactive.”
He next had to answer some pointed questions about how the search for a buyer was conducted and how he wound up with this proposal. Six people toured the facility, four dealing directly with the landlord, Hooper said, and Adams’ offer was best. But time was short, he said, and they did not “advertise.”
Subsequently explaining the “investor” members whose contracts would not be honored, Hooper went into a quick summary of how, he said, owner Bob Padgett – “I’ve got my eye on Mr. Padgett,” the judge interjected at that point – had requested $5,000 investments that supposedly would include $3,000 in membership credits. But those, Hooper contended, were deals that were made directly with Padgett, not with West Seattle Fitness, the entity that is now going through Chapter 11.
Adams’ lawyer said he needed time to look at the pre-existing contracts “so he can’t really speak to what the obligations are,” but he will make it “a priority. … He’s a businessman, he needs to have dues coming in,” she said, “he can’t afford to alienate 2,100 people.”
Observed the judge, “They seem a little alienated at this point already.”
The 503 Olive lawyer asked whether the landlord had rejected other potentially qualified buyers. The landlord’s lawyer, accusing the other lawyer of coming into the case “at the midnight hour,” suggested the “members don’t appreciate this because they don’t know – the landlord is owed $2.5 million .. until the trustee was appointed, he hadn’t been paid since October, and still has seen nothing for January through March … what the landlord is trying to do is get a viable tenant that pays a fair-market value. What Adams is going to pay is less than what the original lease called for – with two months of free rent to get up and running. If this doesn’t go through, the place goes dark, and we get the place back in two months in bad condition. Mr. Adams is committed to renovating the facility, and that’s important to the West Seattle area as well.”
At that point, Judge Overstreet had heard enough: “I’ll be approving the sale, and here’s why.” Before going too deeply into “why,” though, she said, “I have heard enough already about activities by Mr. Padgett that I will personally prepare a letter and ask the US Attorney’s Office to investigate what has been done … When we have a (Chapter 11 filing) we expect the (filers) to honor commitments” (to what they are supposed to do to make notifications, etc.).
“What concerns me the most is that the membership has the opportunity to continue to go to a club in their neighborhood.”
She warned Adams directly, “You have heard what people (testifying) had to say – they are not happy. I can’t order you to honor (pre-existing) contracts. … I think the trustee has provided sufficient evidence that this is in the best interest of the estate.”
This is nowhere near the end of the Chapter 11 case itself, but regarding the club, it was time to move on, and the remainder of the discussion had to do mostly with paperwork and timelines. First the judge said she would sign the order of sale Monday; the trustee said the bill of sale was prepared and ready to go, so then she said that if it got to her in time, she could sign it today.
(Here’s the order as entered into the online record at 3:30 pm today – not described as having been signed by the judge yet, though.)
Adams would be going to the club today “to talk to the staff,” the judge was told, and then a discussion ensued about improving communication to members – even if it meant getting relevant documents onto the court’s website and directing members there. There was a promise in the short run that a notice to members would be posted at the club this afternoon.
One last loose end was tied up – instead of the April 5th hearing on a motion to limit the need for sending future notices to all members, each motion that comes to the court can be discussed individually regarding what kind of notice is appropriate.
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