SERIES THE CRUNCH FITNESS FIASCO
THE OUTRAGEOUS CRUNCH FITNESS BANKRUPTCY
by David Arthur Walters
The Miami Mirror
June 17, 2011
MIAMI BEACH – Crunch Fitness’ Chapter 11 bankruptcy reorganization was a travesty, the purpose of which was to rid the enterprise of unsecured creditors owed $25 million, including funds advanced by members, amounts due on real estate and equipment leases, accounts payable to vendors, and money owed to former Crunch CEO Marc Tascher on his management contract. Angelo, Gordon & Co., the private vulture investment firm, having gotten rid of its patsy, Tascher, whose excellent reputation in the industry was used to obtain investors when Crunch was originally purchased from insolvent Bally Fitness, had worked out a hell of a deal in advance of the planned Crunch bankruptcy.
Angelo Gordon bedded down with Mark Mastrov’s New Evolution Ventures LLC after disposing of Tascher. Fitness industry icon Mastrov had sold his interest in 24 Hour Fitness as part of a $1.6 billion leveraged deal, and was apparently looking for something to do and places to invest his gain after he and the purchaser, private equity firm Forstmann Little & Company, had a falling out and he “resigned” as chairman of 24 Hour Fitness, which he had co-founded in 1983. Together, Angelo Gordon and New Evolution Fitness used CH Fitness Investors LLC, their stalking-horse partnership set up for the purpose, to snatch the Crunch assets out of bankruptcy, to be managed by Mastrov and his defected 24 Hour Fitness crew – Jim Rowley, his old colleague, would take the helm of CH Fitness as CEO. A financial advisor, FocalPoint Securities LLC, was brought in to secure outside bids, but of course no one would outbid CH Fitness’ $40 million credit bid for the kit and caboodle. Although the failed Crunch as a whole was worth less than the credit bid if the outfit was run in the same fashion, Angelo Gordon and New Evolution Fitness and investors stand to realize substantial gains if the McDonaldization of Crunch goes well, as we have discussed previously in ‘Welcome to McCrunch’.
According to a May 6, 2009, Bloomberg report, U.S. Bankruptcy Judge Robert Gerber complained that he was having a hard time not yelling at the lawyers for renting out the courthouse to get rid of unsecured creditors. He said Crunch Fitness’ bankruptcy documents violated bankruptcy law and failed to disclose the nature of the plans to sell Crunch to Angelo Gordon and its partner.
In fact, Angelo Gordon owned 92% of prospective acquisition company CH Fitness, the 8% balance being owned by Mastrov’s New Evolution Ventures et al. Angelo Gordon also owned 90% of the equity of debtor AGT Crunch. CH Fitness, which had already bought the Goldman Sachs primary secured debt owed by AGT Crunch, would use part of that $57 million secured debt claim, $40 million, to buy the company in bankruptcy via a credit bid, and write off any deficiency – the deficiency claim would amount to about $22 million because of additional loans. It also had around $23 million outstanding under second-lien notes, due to AG Super Fund, an Angelo Gordon entity, which would be waived. Unsecured creditors would get shafted for $25 million – that was the point of the bankruptcy, which looks rather mean given the billions managed by Angelo Gordon and the rumored $400 million net worth of its bedfellow Mark Mastrov.
Judge Gerber said the credit bid provision was “one of the most outrageous provisions I’ve seen in 40 years of practicing law.” Citing his concern with the millions owed unsecured creditors, much of which was due to New York landlords at the time, the judge said, “You are proposing a sale to yourselves under the rubric of calling it a credit bid to another party, and would use the Debtor in Possession to wipe out another party.” The U.S. Trustee noted that six of the company’s seven board members were controlled by insiders.
Dechert, LLP, the prestigious New York law firm that had done considerable business with Angelo, Gordon & Company, applied to the bankruptcy court to represent debtor AGT Crunch. Dechert reveals that its history is “long and impressive.” That purportedly illustrious history began in 1875; one of its founding partners even served as President James Garfield’s attorney general; another founding partner wrote a book entitled Principles of Equity. Today Dechert states that it is a “leading international law firm” with 21 offices in the United States, Europe and Asia. Needless to say, its lawyers are internationally acclaimed; some of its lawyers have become judges; and the firm represents headline-making players on the global economic scene. Its most important core values are client service and becoming a stronger firm, not to mention the honesty and integrity most firms mention in their mission statements.
The esteemed Dechert lawyer Charles I. Weissman represented the buyers in the original purchase of the Bally Fitness and Tascher clubs, which would be combined into the new Crunch Fitness and eventually run into bankruptcy. Weissman represents private equity sponsors and distressed investors, public and privately held corporations, special committees, and company management in connection with mergers and acquisitions, corporate finance, and restructuring matters. He has structured and negotiated friendly and unfriendly transactions on behalf of buyers and sellers in leveraged and unleveraged deals, represented issuers and underwriters in connection with equity and debt financings, and has advised on consensual and distressed restructuring transactions inside and outside of bankruptcy. When the Crunch venture failed, he represented the buyers of the bankrupted Crunch. It appears that his underlying responsibility was to the interests of Angelo Gordon, no matter which entity he ostensibly represented
Dechert’s application to represent AGT Crunch in the bankruptcy proceeding disclosed that the firm had received $1.3 million fees from AGT Crunch in the year just prior to the bankruptcy petition – we note that it received another $201,269 shortly thereafter, billed in June 2009. $682,560 of the fees received in the year prior to the petition was related to the filing of the bankruptcy. The Dechert statement to the court had declared, “Since the closing of the acquisition, Dechert has represented only the Debtors and did not represent Angelo Gordon & Co. or any of its affiliates in matters relating to the Debtors.”
United States Trustee Diana G. Adams, in her June 15, 2009, Objection to the Debtor’s Application to Employ Dechert LLP as Bankruptcy and Restructuring Counsel, argued that Dechert failed to make adequate disclosures, misrepresented its interests, and that its concurrent representation of debtor AGT Crunch and creditor/investor Angelo Gordon violated bankruptcy law and rules of procedure as well as New York State’s Ethics Rule.
“Dechert,” she said, “misrepresented that since the closing of the Bally Acquisition, Dechert has not represented Angelo Gordon or any of its affiliates in matters relating to the Debtors. In fact, the [Shmuel] Vasser Affidavit failed to disclose Dechert’s representation of Angelo Gordon in the Gem Star Litigation, nor does it even disclose the EP Litigation. These representations should have been known to Dechert as of the Petition Date because the partner involved in the Fitness Litigations is involved in this case.”
We shall address elsewhere the fascinating Gem Star and EP litigation mentioned by Adams. The lawsuits were brought by the owners of two clubs managed by Marc Tascher’s management company before it was purchased by AGT Crunch Acquisition LLC.
Dechert naturally offered to remedy its conflicts after they were uncovered, and claimed that representation could be divided between it and [unsecured creditor] Committee counsel [Ronald Friedman of Silverman Acampora] in the event of conflicts. To that Adams said, “Dechert suggests that to the degree that it cannot represent the Debtors as counsel on any issue, Committee counsel can perform its duties. In every bankruptcy case debtor’s counsel and committee counsel have differing fiduciary duties running to different, and often adverse, constituencies. For Dechert to propose that it can cure its conflicts by relying on Committee counsel to do its job, when even the Court noted that this case was filed in order to wipe out the unsecured creditors, is remarkable.”
Well, then, Dechert figured it could resign from Angelo Gordon; but the Trustee disagreed: “Dechert proposes to resign its current representation of Angelo Gordon in the Fitness Litigations to cure any conflicts going forward,” the Trustee noted, “however, the horse has already left the barn. Even if it were possible to cure the conflict by withdrawing, the services Dechert has provided to the Debtors in the bankruptcy to date have been completed while it had a ongoing conflict. Consequently, any fees incurred by Dechert prior to the approval of this retention should be disallowed or disgorged.”
This was certainly not the first time Dechert had been accused of enjoying conflicting interests: for instance, was see that Dechert was sued in October 2004 over fees paid to the firm for its work advising an investor group on the acquisition of a paper mill in Brevard, N.C., RFS Ecusta, which eventually went bankrupt. The mill’s assets were acquired in 2001 from P.H. Glatfelter, a Pennsylvania paper products company. The plaintiffs claimed that the transaction was fraudulently structured for Dechert to receive around $1 million in fees. Dechert admitted it received the fees, but claimed the payments were made in good faith. U.S. district court judge Graham Mullen approved a settlement in the case with Dechert funding the entirety of the $1.4 million payment.
We shall inquire of the Clerk of the Supreme Court of New York whether or not a complaint has been brought against Shmuel Vasser, the Dechert law partner who signed the affidavit regarding the Angelo Gordon/AGT Crunch conflicts, or anyone else involved, for the alleged violation of the rules governing the practice of law.