A court-appointed trustee is criticizing the attempt by an affiliate of World Gym Honolulu to reorganize its debts in bankruptcy, and has recommended that the company liquidate assets to pay its debts or have its bankruptcy case dismissed.
Assistant U.S. Trustee Curtis Ching filed a motion Friday in U.S. Bankruptcy Court in Honolulu seeking to convert the Chapter 11 reorganization case of Gap Fitness Partners LLC, which does business as World Gym Honolulu, to Chapter 7 liquidation.
If liquidation isn’t appropriate, Ching said the case should be dismissed, which would allow a landlord to evict the gym from its Kakaako location.
Ching claims that Gap Fitness hasn’t complied with basic duties and requirements as a debtor in bankruptcy. The trustee also said in the motion that the company appears to have been set up to hold the lease on the gym space while a separate but related company actually collects revenue and manages the gym.
"The debtor apparently engages in no business," Ching said in the motion. "It is merely the lessee of a commercial lease. It continues to incur lease rent and has no ability to pay."
Ching said Gap Fitness, which is led by John J. Michael of Woodinville, Wash., appears to have operated World Gym in the first year of the lease, but at some point transfered management to another entity owned by Michael called JM Honolulu LLC. In turn, JM Honolulu has a billing service agreement with another Michael company, AFG Group LLC, which receives gym revenue.
The trustee also criticized Gap Fitness for sending the gym’s manager, Thomas Akins, to discuss the case at a meeting with creditors Thursday when Akins was unfamiliar with the debtor’s finances.
Ching, who attended the meeting, said Akins responded that he had "no clue" what business Gap Fitness was in, did not know how gym revenue was used, did not know whether the gym owned its equipment and had not read financial disclosure statements filed in the case by Gap Fitness.
"His only knowledge of the debtor’s plan for reorganization was that John Michael had told him that money would be coming in ‘from Seattle’ to satisfy claims," Ching said in his motion.
Sending Akins to the meeting was unfair to Akins and violated Bankruptcy Court rules requiring that someone in senior management of the debtor attend the meeting with creditors, Ching said.
Other basic bankruptcy rules violated by Gap Fitness include not seeking to employ an attorney and not providing a proper corporate resolution authorizing the bankruptcy filing, the trustee’s motion said.
Michael could not be reached for comment Friday.
Gap Fitness filed for Chapter 11 on Feb. 2 after World Gym’s landlord moved to evict the gym after prevailing in a state court lawsuit that claimed Gap Fitness owed $140,539 in back rent as of September.
The landlord, the Hawaii Housing Finance and Development Corp., claimed in its lawsuit that AFG and Michael personally guaranteed the gym’s rent for the 13,766-square-foot space at 1050 Queen St. in the Kamakee Vista building mauka of Office Depot.
HHFDC, a state agency that helps develop affordable housing, has sought Bankruptcy Court permission to move ahead with eviction. A hearing on that matter is scheduled for April 1.
