Allstar Fitness bankruptcy: Hearing tomorrow; new court filings – and a warning

March 21, 2013 at 2:27 pm | In Allstar Fitness bankruptcy, West Seattle businesses, West Seattle news | 26 Comments

(UPDATED THURSDAY EVENING with new comments from prospective club buyer Sam Adams, and another “response” document – both updates added at end of story)
By Tracy Record
West Seattle Blog editor

Continuing our coverage of Allstar Fitness‘s Chapter 11 bankruptcy case, there are new developments as the proposed sale of the club’s assets goes before a federal judge downtown tomorrow morning:

More than 50 responses and/or objections to the sale motion have been filed, according to our most recent check of the online docket. We haven’t read all of them yet; most appear to be from individuals, with one exception: GRE 509 Olive LLC.

Its objection involves both the sale and the purchase. You can read it in its entirety here; while we’ve been working on this story, a response has been filed as well – a response saying that if the sale is not approved, the bankruptcy will go to Chapter 7 and the club will close, and had already been on the brink of closing in January.

First, excerpts from the objection:

GRE is scheduled as a secured creditor of West Seattle Fitness, LLC (the “Debtor”) as being owed approximately $2.5 million. As the Trustee acknowledges in the Motion, GRE filed a UCC financing statement in November 2009, which covers virtually all assets of the Debtor. …

West Seattle Fitness, it should be noted, is the official corporate name for Allstar’s current ownership, which has declared Chapter 11 bankruptcy. GRE 509 Olive LLC goes on to list three points of objection, excerpted:

1. The Sale Generates No Value to the Estate. The Trustee proposes to sell all of the fitness equipment, fixtures, furniture, inventory and certain intangible personal property that includes customer lists for a mere $75,000. GRE has a security interest in all of these assets. Unless the Trustee can avoid GRE’s lien or obtain a section 506(c) surcharge, none of the proceeds will go to the estate. …

2. No Evidence the Buyer Can Perform. According to the Motion, an important aspect of the proposed sale is the Buyer’s assumption of month-to-month memberships in good standing and all post-petition prepaid Club memberships (the “Assigned Contracts”). But no information about this Buyer is presented, and there is no evidence that the Buyer will be able to successfully operate and perform in the future. The Court should be aware that the principal of the Buyer is subject to a non-compete agreement with GRE, and it appears that his acquisition and operation of the Club will violate that agreement.

This appears to refer to a clause of a lease for the former Allstar Fitness space into which Sam Adams and a former business partner moved another club two years ago; they are listed as “guarantors” of an agreement that includes a clause saying that guarantors (among others) cannot have any kind of financial or ownership in a club in the state of Washington until.

Point #3 notes that Adams must sign a lease with the Allstar site’s landlord in order to operate the club, and says nothing has been presented to say he has or will. When we spoke with Adams, he said the lease would not be a problem, but didn’t offer specifics.

Since we started working on this story, a response to that motion has been filed – by the landlord; read it in its entirety here. The Allstar property owner’s response contends that GRE 509 Olive LLC did not file a claim in time; even if they did, the claim is “undersecured,” the response contends, saying, “Indeed, the Court was on the verge of converting this Chapter 11 proceeding to a Chapter 7 proceeding and having the club go dark in January 2013. … If this sale is not approved, then the Court will be compelled to convert to a Chapter 7, the Landlord will take the premises back (the Debtor has already rejected the lease and is only operating on a month-to-month term), and the Estate will lose everything.”

The response also says the Allstar property owner believes that Sam Adams considers the non-compete clause unenforceable. It also makes statements about the memberships that are at issue. And it repeats the warning that rejection of the sale to Adams will lead to Chapter 7 and club shutdown. The document is not allowing cut-and-paste so far, so while we work on transcribing those passages, here again is the link at which you can read the document for yourself.

Next step in all this is up to Judge Karen Overstreet, in whose federal courtroom the sale motion will be heard tomorrow morning at 9:30 am.

P.S. We have just tagged all our Allstar Chapter 11 stories so you can browse past coverage – reverse chronological order, here (or click the “Allstar Fitness bankruptcy” link under the headline of this or any of those stories).

ADDED 9:13 PM: As noted in comments, though we did not have a new message out to him, Sam Adams called WSB researcher/reporter Katie Meyer this evening (she had left messages for him while we were trying multiple ways to reach him for comment after he emerged as the prospective purchaser, but not since March 10th, when he called your editor here via the WSB business line). What he told her regarding issues mentioned in the GRE 509 Olive LLC objection to the sale:

*Regarding the club lease: “The lease is ready to be signed as soon as the judge approves the sale.”

*Regarding the non-compete clause: He believes it is not enforceable.

*In general, he believes GRE’s objections are not about him but about the money they say Allstar’s current ownership owes them. “This (GRE) is another person who was burned [by Allstar ownership] and I have nothing to do with that.”

Speaking of which – he reiterated what he told us a week and a half ago, that he will “honor 99% of those pre-paid memberships. I’m sorry, there will be some people who invested in the business, those who have lifetime, or 3, 4, 5-year memberships – those are not memberships, those are investments/partners in the business which no longer exists, they are not MY partners, but I want them to be members of the club. … I am looking to honor the majority of prepaid memberships – the buy a year, get one year free, buy 6 months get 6 months, I want to honor THOSE. I’m coming to fix up the club, I want to be a positive business in West Seattle, it’s a great community and a great club that needs improvements. (But) If people paid $3k, or $100k, those are investments in a business that is no longer there, and I’m sorry. … It’s a great community, and I want to be a part of it. The club is a ship that needs to be righted, and the members deserve to have it righted. I want to do my best to right the ship, to clean up the club, and we will do right by as many people as we can. … Out of the 2100 people listed as having/being an issue, it’s probably closer to like 50 to 100 that are real problems, that were investments [with the current ownership]. The rest, we plan on honoring those. We are going to honor prepaid memberships. It’s a handful, it’s not thousands, it’s not hundreds, it’s a handful that are investments not prepaid memberships.”

And there’s yet ANOTHER new document in the case file, added late today – a response to the dozens of objections, filed on behalf of the Chapter 11 bankruptcy trustee Richard Hooper, who has been in charge of club operations for an interim period while pursuing a sale. This response addresses one known error in previous documents and also says some names are on the “Rejected Contract” list because of inaccurate information. See the document in full here; here’s an excerpt:

1. Many of the Responses filed appear to have been filed based on a typographical error in the Notice of Hearings sent to the creditors and members of the fitness club located at 2629 SW Andover Street, Seattle, WA 98126 operated by the Debtor and commonly known as ALLSTAR FITNESS (the “Club”). The Notice of Hearings stated in part:

The Trustee also seeks Court approval to (1) assume and assign to the buyer the contracts of those members on month-to-month contracts and those members on prepaid long term memberships who purchased those membership AFTER the start of this bankruptcy case on August 27, 2013, and (2) to reject and terminate the contracts of the remaining long term prepaid members upon the sale of the Club to the buyer.
(emphasis added)

Accordingly, a number of members believed their contracts would not be assumed and assigned to the Buyer when in fact the underlying motion and purchase and sale agreement made clear that it is the intention of the proposed purchaser of the Club, West Seattle Fitness Club, LLC (the “Buyer”), to assume all membership contracts entered into by the Debtor on or after August 27, 2012, as this bankruptcy case did not commence until August 27, 2012,

2. This typographical error was further compounded by what the Trustee discovered to be partially inaccurate records kept by the Debtor with respect to the date of entry of many of the long-term prepaid contracts in its system. In preparing Exhibit B to the Trustee’s Declaration filed in support of the Motion (Dkt. No. 95), the Trustee relied on Club data to prepare a list of those members with contracts dated prior to August 27, 2012. Unfortunately, the data provided by the Club proved inaccurate, as a number of members who entered contracts dated after August 27, 2012 appeared on the list of pre-petition long-term prepaid contracts being rejected.

3. In order to further clarify the intentions of the Buyer and the Trustee with respect to which contracts and agreements will be assumed by the estate and assigned to the Buyer, and those rejected, the Trustee and Buyer have entered into a First Amendment (the “Amendment”) to the Asset Purchase Agreement dated March 1, 2013 (the “APA”) attached as Exhibit A hereto. The Trustee would further propose that any order approving the Sale Motion reflect similar language.

26 Comments

  1. I feel we should thank Sam for taking over the club . I have paid in advance as many have, but if I had to I would rejoin on a monthly basis..it will take a lot of Sams money to fix it up.
    I was very sad to hear that Geof won’t be around. THought he was the best…Good luck Sam, think you will need it!!

    Comment by Kathy R — 3:02 pm March 21, 2013 #

  2. What is consider a “prepaid contract?” My name is on the list but I have been on month-to-month for years. Is it because I have a contract locking in a certain rate? Or is prepaid the same as “paid in full in advance?”

    Comment by roberta — 3:08 pm March 21, 2013 #

  3. Oooh! What deliciously scary threats by the landlord who has been grossing $125k a month for how many years now? “The club will go dark.” In that case, maybe it can become a disco?
    Counsel for the landlord H-P Properties: How is it that members who have pre-paid are now putting “an extraordinary strain on the buyer’s operational capital”. Because we are the ones who have kept this club afloat with over a million dollars in “pre-petition” revenue and you now “reward” us by agreeing that our memberships should be cancelled? WE ARE THE ONES WHO HAVE BEEN CONTRIBUTING TO YOUR EXORBITANT RENT, H-P PROPERTIES. “WE ARE THE 99%.”

    And TR, thank-you for your up to date reporting. One more qtion for you: Exhibit A to the Trustee’s Motion (the contracts to be assumed and not terminated), only lists 211 members — not including the month-to-month members. If the club has a membership of 6,900 (according to the Trustee), and 2,100 are to be rejected and only 211 “long-term” contracts accepted — this leaves a difference of 5,011 members. Not all of those can possibly be month-to month memberships — so how to explain this gap? Which circle of Dante’s hell are these 5,011 members living on in this Bankruptcy proceeding?

    Comment by Cynaur Sardi — 3:20 pm March 21, 2013 #

  4. I’m going to bet the sale will still go through. Either way, GRE 509 Olive LLC doesn’t get paid. If the sale goes through, they get in line with any other secured creditors for a small piece of what might remain of the $75K sale price. If the club closes, they get in line again and have to try and secure the equipment and then sell it. Whether that would even be possible remains to be seen. But after the cost of taking the equipment, commissions on sales, sales revenue, they would be left with hardly anything. While their objection might be valid, I doubt the judge will block the sale.

    I hope the judge does the right thing and approves the sale. It’s in the best interest of the club members and the community. If not, we all have to find another fitness club to join.

    Comment by Brewmeister — 3:28 pm March 21, 2013 #

  5. Cynaur – I don’t know – though the answer might be buried somewhere in documents I haven’t seen yet. Thank you for your comment because I have added a clarification – the response is from the Allstar site owners, not the club owners (aka “debtor”) – so there is no misunderstanding. So I’ve added “site” though I may change it further to “property” after another moment or two of pondering – TR

    Comment by WSB — 3:32 pm March 21, 2013 #

  6. Sounds fishes maybe some one is doing some funny back business stuff to take over the only club n Seattle .

    Don’t go against Allstar only to let another wolf
    Watch the sheep

    Comment by G — 4:23 pm March 21, 2013 #

  7. This is small potatoes. If the place shuts down, it shuts down.

    Just get off your yoga mats and go for a long walk or run. Do a few push-ups and sit-ups and …you get the picture…

    Comment by Whatever — 4:36 pm March 21, 2013 #

  8. What does this mean for people who currently have a contract being billed monthly? Will they just stop billing your card? Does something have to be done?

    Comment by Contract holder — 6:20 pm March 21, 2013 #

  9. PLEASE ADDRESS THE INOPERATIVE EQUIPMENT.

    Comment by Amrakx — 7:55 pm March 21, 2013 #

  10. Wow, it’s like watching a full-on soap opera!

    Comment by NeighborMom — 8:39 pm March 21, 2013 #

  11. Another update – Late today, Sam Adams called WSB researcher/reporter Katie Meyer, though she had not left messages for him in more than a week – she had been helping to try to track him down *before* he called me March 10th somewhat out of the blue (on the published WSB business line). She has sent me notes of their conversation and I’ll be adding them here.

    Comment by WSB — 9:05 pm March 21, 2013 #

  12. I hope the sale goes through and the gym gets its much needed updates! There’s plenty to be frustrated about with the conditions over the last 6-9 months, but the awesome fitness instructors continued leading great classes. Many of us would be very sad to see them go, so I was glad to hear in class that Sam Adams said he would keep the Allstar instructors on staff. Some new equipment would be nice…

    Comment by lizzle — 9:46 pm March 21, 2013 #

  13. I just want the hot tub fixed and ill be a lifetime member

    Comment by lisa — 10:08 pm March 21, 2013 #

  14. I am sorry but all these clubs from history have the same ending, if you entered as an investor you are young or naive. If you entered month to month no matter when you should be honored a continuing memebership. Anything less, I would be happy to get out as you will have the same in 5-10 years time from the new owners, good luck.

    Comment by WSGIRL — 10:51 pm March 21, 2013 #

  15. When does someone start shining a flashlight on the slimy practices of the former ownership. Seems like there’s far more to the story than “poor business sense”.

    Maybe I’ll form an LLC, solicit investments, pocket all the money and never have to be accountable to anyone for it. “What poor business sense I’d have”.

    Comment by Eddie — 5:49 am March 22, 2013 #

  16. I’m glad the see Sam stepping up and addressing the concerns of members about honoring most exiting memberships. Sounds like he’s going to do the right thing assuming the sale is approved today.

    Comment by Brewmeister — 7:41 am March 22, 2013 #

  17. Sounds like a mess. I sure hope one of the other gyms in the area hurries to expand their clubs. Otherwise, The YMCA and 24 hour fitness are going to be a zoo!

    Comment by ymember — 7:57 am March 22, 2013 #

  18. Where can I find this list of excluded contracts? I’m a member and bought one of the buy one year, get one year free contracts that started about 18 months ago. I wanna see if I’m on the list…

    Comment by Jerry Hoffmeister — 8:14 am March 22, 2013 #

  19. If Sam is true to his quotes above then I am very favorably inclined to renew my membership when the time comes.

    Comment by yacman — 8:26 am March 22, 2013 #

  20. Hoping the sale goes through to Sam. Sounds like he will fix the place up and give us the Club we all deserve. Other neighborhoods have much nicer Gyms that are cheaper. I never considered the Investment option, although I did pay for a year Membership as it was the best rate and I had no problem doing this in other cities. Hoping it all works out in the end.

    Comment by Matt — 8:52 am March 22, 2013 #

  21. Sale approved. 2100 contracts rejected! Let corruption reign!

    Comment by Cynaur — 11:09 am March 22, 2013 #

  22. Tracy, a sentence is cut off above:

    ” …(among others) cannot have any kind of financial or ownership in a club in the state of Washington until [omission?].”

    => Until when?

    Comment by brizone — 11:19 am March 22, 2013 #

  23. I hope the sale goes through. I’m not a member (though I have been in the past). I am a neighbor, though, and an athletic club is a good business to have in the area, lots of people go, and if it goes under, I envision it being yet another vacant building that goes empty for years.

    As for the investors, investments aren’t guaranteed to return a profit or even break even. That’s the risk side of it. It’s a strange thing to feel entitled to get one’s money back on an investment.

    Comment by Nancy F. — 12:06 pm March 22, 2013 #

  24. Hi Nancy – You’re correct – Investments aren’t guaranteed, but there is a basic expectation that the money will be handled in a responsible fashion and not shuffled off for who-knows-what (other business or personal) with no accounting or transparency. And if the “business opportunity” being invested in never gets off the ground, for whatever reason, the money that wasn’t used for legitimate expenses related to pursuing that business opportunity should be returned to the investors. Not pocketed as salary, not funnelled into another business opportunity, not channeled into propping up an existing operation, etc.

    Comment by Eddie — 12:22 pm March 22, 2013 #

  25. Sam Adams, as quoted above: “Those who have lifetime, or 3, 4, 5-year memberships – those are not memberships, those are investments/partners in the business which no longer exists, they are not MY partners, but I want them to be members of the club.”

    Hopefully, Adams will realize he’s mistakenly including three-year memberships in his list above. My last membership renewal letter (July 2012) said the choice was pay for one year, get six months free, or pay for two years, get a third year free. The latter was simply one of two membership options. It was in no way an investment in the defunct business, and there was nothing in the letter to indicate otherwise.

    Comment by Bill — 8:05 pm March 22, 2013 #

  26. Any idea when Sam Adams can/will start updating the club? I quit a few months back because I got tired of the place being so run down, now I am anxious to rejoin… after he starts the improvements.

    Comment by PigeonPoint — 11:33 am March 24, 2013 #

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