Thu 10/01/2020 18:49 PM
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Relevant Documents:
Debtors’ Letter

On Wednesday, New York Attorney General Letitia James filed a lawsuit in the New York County Supreme Court against Town Sports International Holdings Inc. and Town Sports International LLC, saying the defendants have committed fraud and violated New York state health club and general business laws by continuing to charge customers for services not rendered and failure to adhere to consumer cancellation requests, among other claims. Town Sports International LLC and various affiliates filed for chapter 11 protection on Sept. 14 but defendant Town Sports International Holdings Inc. is not a debtor.

The state is seeking injunctive relief saying Town Sports engaged in “repeated or persistent illegal conduct” and also requests that the court impose civil money penalties on TSI of $5,000 for each violation of general business law and $2,500 for each violation of New York Health Club Services Law, as well as award monetary damages and other monetary relief. The attorney general also contends in the complaint that the $250,000 bond required by the NY health club law to protect consumers in the event that a gym goes out of business prior to the expiration of a member’s contract or otherwise fails to provide a refund after the cancellation of the contract should be released to the attorney general.

New York gyms have been closed by an executive order due to the Covid-19 pandemic since March 16. Town Sports, however, has continued charging its customers monthly dues and did not issue time credits promised to customers who were still being charged, according to the complaint. Additionally, the complaint contends, Town Sports failed to communicate information about memberships and to implement a membership freeze offered in late March. The attorney general asserts that Town Sports continuing to charge and mislead its customers, notwithstanding gym closures, amounts to fraud and violation of general business law, and that refusing to issue refunds within 15 days, as well as the actions detailed above, are violations of NY health club laws.

The complaint states consumers' have attempted to cancel their memberships by mailing in requests, submitting requests via email and on the website, and appearing in person. Most customers were unable to reach a representative, as most of Town Sports workforce had been terminated due to the pandemic, according to the complaint. Despite those requests, consumers continued to be charged while all gyms were closed and after gyms were allowed to reopen on Aug. 24, in some cases where some locations were closed permanently.

Gordon & Rees, as counsel to the debtors, today sent a letter to the Office of the Attorney General, the Bureau of Consumer Frauds and Protection and the New York County Supreme Court asserting that “this matter is automatically stayed pursuant to section 362(a) of the bankruptcy code.”

Under section 362(a) of the Bankruptcy Code, once a debtor files a chapter 11 case, the automatic stay goes into effect and generally stays the commencement or continuation of judicial, administrative or other proceedings against the debtor that were, or could have been, brought before the bankruptcy petition was filed against the debtor. In certain circumstances, this protection can be extended to affiliates if the action against the affiliate would affect the bankruptcy case.

Regardless, however, section 362(b) of the Bankruptcy Code outlines certain actions that are not stayed under the automatic stay, including actions taken by governmental units under a police or regulatory power exception. The police power exception provides that the automatic stay does not stay the “commencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit’s or organization’s police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit’s or organization’s police or regulatory power.”

The N.Y. attorney general’s complaint argues this exception applies, citing in a footnote case law interpreting the police powers exception to apply “[w]here a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws.”

The complaint brings three causes of action: fraud, “Illegality - Health Club Law (GBL Article 30[)]” and “Illegality - GBL § 349.” The complaint seeks an order and judgment:
  • “[E]njoining TSI from violating New York law, including, but not limited to, charging consumers dues for clubs that have not reopened, failing to provide credits for the period from March 16 through April 8, 2020 and failing to honor consumers’ statutory rights to cancel their contracts;
  • “[G]ranting restitution for New York consumers and disgorgement of all ill-gotten gains;
  • “[I]mposing civil money penalties on TSI of $5,000 for each violation of GBL § 349, as authorized by GBL § 350-d;
  • “[I]mposing civil money penalties on TSI of $2,500 for each violation of the Health Club Law, as authorized by GBL § 629(1);
  • “[A]warding monetary damages or other monetary relief;
  • “[O]rdering TSI to pay costs pursuant to CPLR § 8303(a)(6);
  • “[T]ransferring the $250,000 bond TSI posted pursuant to GBL 622-a to the NYAG; and
  • “[A]warding such other relief as the Court deems just and proper.”
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