December 10, 2020 – The Debtors filed their Second Amended Plan of Liquidation, including blacklines of the document showing changes from the version filed on November 3, 2020 [Docket No. 772]. They separately filed a memorandum of law in support of confirmation of the Second Amended Plan [Docket No. 773].

Previously on November 3rd, the Court issued an order approving (i) the adequacy of the Debtors’ Disclosure Statement (conditionally) (ii) Plan solicitation and voting procedures and (iii) a timetable culminating in a December 14th Plan confirmation hearing [Docket No. 561].

The memorandum brings to light an issue that will almost certainly prove to be a major point of discussion as the Debtors look to wrap up their Chapter 11 cases and could affect recoveries to General Unsecured Creditors that were included in the Plan in accordance with a settlement agreement. Specifically, the Prepetition Loan Claims class has voted to reject the Plan, despite a previous agreement by the Prepetition Lenders to support confirmation.

The Debtors' address this development in the memorandum, stating. "With respect to Class 4 (Prepetition Loan Claims), the Debtors are hopeful that the members of the Term Loan Group will remedy their current breach of their obligations under the Settlement Agreement to support and vote for the Plan. The Term Loan Group actively engaged in the negotiations that led to the recovery to the Committee that is embodied in the Plan and Asset Purchase Agreement, which this Court has already ruled is binding on the Term Loan Group.

The Asset Purchase Agreement specifically provides that consideration from the Purchaser will be set aside for the benefit of unsecured creditors. The Term Loan Group’s failure to abide by the Settlement Agreement may frustrate the orderly wind down of these estates, including the distribution to unsecured creditors previously agreed to by the Term Loan Group. The Court should not allow the Term Loan Group’s refusal to abide by the Settlement Agreement to disrupt the Plan (and the recovery to General Unsecured Creditors contemplated thereby).

To the extent the Term Loan Group does not change its vote, the Debtors intend to seek confirmation of the Plan at all applicable Debtors, including seeking whatever equitable relief may be merited under the circumstances to avoid an inequitable and value destructive outcome to these Chapter 11 Cases. Nonetheless, even if the Court determines that Class 4 voted to reject the Plan, as more fully described below, the Debtors meet the requirements of section 1129(b) of the Bankruptcy Code to “cram down” these rejecting classes." 

The Debtors point out in the memorandum that this is not the first issue they've had with the Prepetition Lenders. "The Plan should be confirmed despite the rejection of the Plan by Class 4, as the Term Loan Group has represented its support for the Debtors’ restructuring transaction throughout these Chapter 11 Cases, including through negotiating and commenting on the Plan and the Disclosure Statement. Just as the Bankruptcy Court found that the Term Lender Group could not back out of its credit bid obligations pursuant to the sale of substantially all of the Debtors’ assets, the Debtors believe that the Term Lender Group’s support for the Plan and the Plan process should be imputed based on the Debtors’ reliance on such support during these Chapter 11 Cases. Importantly, if the Plan is not confirmed, the Debtors may incur significant additional incremental costs in converting these Chapter 11 Cases to a chapter 7 liquidation, which would unfairly jeopardize any recovery to the Debtors’ stakeholders, including administrative creditors and General Unsecured Creditors who have relied on the Term Lender Group’s commitments during these cases." (See more on Lender Group's motion to Block the Debtors' sale below).

Regarding outstanding objections to Plan Confirmation, the memorandum [Docket No. 773] states that the Debtors "believe that the remaining Objections either (a) will be resolved through agreed language in the Plan or Confirmation Order prior to the Confirmation Hearing or (b) are related to adequate-assurance objections that have already been resolved or will be addressed independently of the Confirmation Hearing."

The memorandum [Docket No. 773] notes, “Confirmation of the Plan is the culmination of hard-fought, good-faith negotiations among and between the Debtors and their key stakeholders — an effort that includes the consummation of a value-maximizing going-concern sale transaction that saved a substantial number of jobs, benefits customers and ensures vendors and other stakeholders will have an opportunity to transact with the Purchaser on a go-forward basis. The Plan structure — including the Prepetition Term Lender’s 20 percent equity stake in the go-forward business on account of the sale transaction and a $1 million contribution from the Purchaser to the General Unsecured Creditors — was negotiated between the Debtors, the Term Lender Group and the Purchaser (as applicable) as part of the Stalking Horse Bid negotiations. This cash contribution was intended to — and in fact did — help facilitate a smooth chapter 11 case that did not unnecessarily utilize estate resources. But, the agreed contribution was not on account of any particular estate asset or cause of action.

Later, as part of Plan negotiations, the Committee negotiated for the Non-Released Claims Trust, funded from the agreed $1 million Purchaser contribution to unsecured creditors. This resolution with the Committee was supported by the Debtors and other primary stakeholders, including the Term Loan Group and the Purchaser. The Committee supports the Plan. Without these hard-fought negotiations, there would likely be no recovery to unsecured creditors and the Debtors’ estate may be administratively insolvent. But, because of the global consensus reached as part of the Stalking Horse Bid, the Plan brings an orderly, efficient and value-maximizing conclusion to these Chapter 11 Cases."

Overview of the Plan

The First Amended Disclosure Statement [Docket No. 549] notes, “Prior to the Petition Date, the… Debtors engaged with certain of their prepetition lenders on the potential terms of DIP financing and an overall restructuring transaction. In connection with these conversations, the Debtors had interest from two groups of Prepetition Lenders regarding potential financing proposals. After further negotiations with both parties, and upon review of each of their respective proposals, the Debtors ultimately decided to move forward with the proposal submitted by Tacit Capital (‘Tacit’), in collaboration with the applicable ad hoc group of Prepetition Lenders. Tacit’s proposal consisted of a DIP facility, coupled with a going-concern credit bid of substantially all of the Debtors’ assets. That bid formed the basis for the Debtors’ DIP financing and stalking horse bid.

Generally speaking, the Plan: 

• provides the vesting of all Available Cash from the proceeds of Sale Transaction in the Post-Effective Date Debtors for the purpose of distribution to Holders of Claims;
• provides for the full and final resolution of funded debt obligations;
• designates a Plan Administrator to wind down the Debtors’ affairs, pay and reconcile Claims and administer the Plan in an efficacious manner;
• contemplates recoveries to Holders of Administrative Claims, Secured Tax Claims, Priority Tax Claims, Other Priority Claims and Other Secured Claims as is necessary to satisfy section 1129 of the Bankruptcy Code; and
• provides for the creation of a Non-Released Claims Trust for the purpose of investigating and, if appropriate, pursuing the Non-Released Claims Trust Causes of Action, solely to the extent of available insurance coverage (pursuant to the terms specified in Article VIII.C.3 of the Plan), for the benefit of the Non-Released Claims Trust Beneficiaries.”

The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, also see Liquidation Analysis below):

• Class 1 (“Secured Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is TBD and the estimated recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 100%.
• Class 3 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is TBD and the estimated recovery is 100%.
• Class 4 (“Prepetition Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $167,163,283.42 and the estimated recovery is 47.8%. Each Holder of a Prepetition Loan Claim shall receive its Pro Rata share of (not to exceed the amount of such Holder’s Prepetition Loan Claim) the Excess Distributable Cash in accordance with the distribution waterfall set forth in Article IV.C of the Plan. For the avoidance of doubt, no Holder of a Prepetition Loan Claim shall receive any Non-Released Claims Trust Interests or otherwise participate in the distributions to the Holders of Class 5 General Unsecured Claims under this Plan, including on account of any deficiency claims. ^FN: For the avoidance of doubt, the projected recovery for Holders of Class 4 Prepetition Loan Claims reflects the Term Lender Group’s $80 million credit bid.
• Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $109.0mn – $218.0mn and the estimated recovery is 0.5% – 1.0%. Each Holder of a General Unsecured Claim shall receive: its Pro Rata share of the (i) Non-Released Claim Trust Interests; and (ii) a complete waiver and release of any and all Claims, Causes of Action and other rights against the Holders of Class 5 Claims based on claims pursuant to chapter 5 of the Bankruptcy Code or under similar or related state or federal statutes and common law, including fraudulent transfer laws from the Debtors, the Post-Effective Date Debtors and their respective Estates.
• Class 6 (“Intercompany Claims”) is unimpaired, deemed to accept or reject, and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 7 (“Intercompany Interests”) is unimpaired, deemed to accept or reject and not entitled to vote on the Plan. The aggregate amount of interests is N/A and the estimated recovery is N/A.
• Class 8 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is 0%.
• Class 9 (“Interests in TSI”) is impaired and not entitled to vote on the Plan. The aggregate amount of interests is N/A and the estimated recovery is 0%.

Voting Results

On December 10, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 775], which were as follows.

Class 4 (“Prepetition Loan Claims“): 5 claim holders, representing $83,819,577.35 (61.41%) in amount and 31.25% in number, voted in favor of the Plan. 11 claims holders, representing $52,671,954.81 (38.59%) in amount and 68.75% in number, rejected the Plan.

Class 5 (“General Unsecured Claims”): 17 claim holders, representing $52,671,954.81 (94.30%) in amount and 73.91% in number, voted in favor of the Plan. 6 claims holders, representing $48,003.84 (5.70%) in amount and 26.09% in number, rejected the Plan.

The First Amended Disclosure Statement attached the following exhibits:

• Exhibit A: Chapter 11 Plan
• Exhibit B: Liquidation Analysis (not clear why this is Exhibit C and not B)

Lender Motion to Block Sale

As previously reported, on November 27, 2020, an ad hoc group of term loan lenders claiming to hold a majority of amounts outstanding under the Debtors' November 2013 First Lien Loan Agreement (the “Ad Hoc Term Lender Group”) filed an emergency motion to block the already Court approved $84.7mn sale of substantially all of the Debtors’ assets (“Sale”) to New TSI Holdings, Inc. ("New TSI"), which had served as a stalking horse before being named as successful bidder in late October [Docket No. 710].

New TSI is an entity formed by prepetition lender Tacit Capital LLC (“Tacit”) and a group of further prepetition term lenders, including members of the Ad Hoc Term Lender Group, with Tacit to contribute the cash necessary to complete the Chapter 11 cases and then fund the Debtors' go-forward efforts with a $47.5mn cash contribution. The prepetition lenders were to contribute $80.0mn of prepetition debt in the form of a credit bid.

The Ad Hoc Term Lender Group claims that Tacit, unable to source its promised financing, has effectively withdrawn from the deal and ceded its role to "principals of 507 Capital and Peak Credit LLC (together, 'Peak'), who appear to have now effectively stepped in for Tacit." It further notes that Peak wants to push forward with completion of the sale and confirmation of the Debtors' Plan without out actually having been given the right to credit bid the $80.0mn of prepetition debt that is a critical element of the agreed purchase price; the majority of which is held by the Ad Hoc Term Lender Group, a position that gives them "the power to direct the Agent to exercise remedies, including to credit bid all or a portion of the loans outstanding under the Credit Agreement." As galling as Peak's presumption that it can credit bid debt with which it has no connection, is Peak's refusal to honor Tacit's role as provider of going concern financing without which the Debtors are "destined for a quick return to the bankruptcy court."

The motion continues as to the Ad Hoc Term Lender Group's sine qua non role in the asset sale, "As the credit bid was never contributed to the Buyer, the Buyer cannot meet the conditions for closing the Sale under the Asset Purchase Agreement."

The Ad Hoc Term Lender Group's motion [Docket No. 710] states, “Following a contentious opening to these chapter 11 cases, the Ad Hoc Term Lender Group has worked hand in hand with the Debtors to forge a smooth path to exit from bankruptcy that maximizes value for the benefit of all of the Debtors’ stakeholders. To achieve this, the parties, including the Debtors, the Ad Hoc Term Lender Group, Tacit Capital LLC ('Tacit'), and the official committee of unsecured creditors (the 'Committee') reached an overall deal that would provide adequate capital for the Debtors to bridge to a sale of substantially all of their assets to a newly formed entity (the 'Buyer') jointly owned by Tacit and the prepetition lenders ('Prepetition Lenders') under the Credit Agreement, including the Ad Hoc Term Lender Group. The new entity would also include takeback debt provided to both the debtor-in-possession lenders and the Prepetition Lenders as part of the consideration for the Prepetition Lenders’ contribution of their credit bid.

The parties worked cooperatively in reliance on this overall deal to document and effectuate the Sale process. In spite of this, principals of 507 Capital and Peak Credit LLC (together, 'Peak'), who appear to have now effectively stepped in for Tacit but who were not involved in negotiating the terms and mechanics of the Sale, are suddenly asserting, inconsistent with Peak’s own prior behavior and inconsistent with the agreement of the parties, the Sale Order, and the express terms of the Asset Purchase Agreement, dated as of October 26, 2020 (the 'Asset Purchase Agreement'), that the Sale can somehow be closed without the Buyer delivering the purchase price required under the Asset Purchase Agreement. The money to capitalize the Buyer is simply not there yet and Peak and the Debtors would like to force the parties to close into a Buyer that is destined for a quick return to the bankruptcy court.

Peak asserts that its minimal contribution of capital — only enough for the Debtors and the Buyers to close the Sale — is sufficient. But Peak has not committed a single dollar to fund the go-forward operations of the Buyer, offers no consideration to the Prepetition Lenders, and makes no effort to provide the key consideration under the Asset Purchase Agreement — the credit bid.

Peak’s position is not only incorrect, but it is illogical, inequitable, and contradicted by the plain terms of the Sale Order and the Asset Purchase Agreement. As part of the Sale, the Ad Hoc Term Lender Group agreed that its prepetition debt could be used as currency in the sale process. As the Ad Hoc Term Lender Group controls more than a majority of the loans outstanding under the Credit Agreement, it has the power to direct the Agent to exercise remedies, including to credit bid all or a portion of the loans outstanding under the Credit Agreement. This was the entire premise of the sale process — at the direction of the Ad Hoc Term Lender Group, the Agent would contribute $80 million of the loans under the Credit Agreement to the Buyer in exchange for an agreed amount of debt and equity issued by the Buyer. The parties specifically agreed to this structure and laid out explicit steps memorializing the same, including requiring as a condition to closing under the Asset Purchase Agreement that the Buyer provide the credit bid as part of the purchase price. As the credit bid was never contributed to the Buyer, the Buyer cannot meet the conditions for closing the Sale under the Asset Purchase Agreement.

Peak has only become involved in the Sale process earlier this month—and after entry of the Sale Order — when Tacit failed to obtain the funding required in order to close the Sale. Specifically, Tacit agreed in the initial global deal to capitalize the Buyer with a cash contribution of $47.5 million to ensure its viability as a go-forward entity. However, following agreement on the structure of the Sale and the entry of the Sale Order, Tacit’s conduct made clear that it would not be able to raise funds in order to make its agreed cash contribution into the Buyer or even fund the closing of the Sale. Tacit initially indicated that it would be able to partially raise the funds needed, but potentially not the full amount. Ultimately, Tacit disclosed that it would not be able to fund any of the cash contribution to the Buyer. By November 11, Tacit informed the Ad Hoc Term Lender Group that Peak was the only party able to provide funding just to close the Sale itself (a mere $5 million), with no go-forward capital committed to the Buyer.

In response to Tacit’s failure to raise funds for its cash contribution to the Buyer and Peak’s unwillingness to commit go-forward capital to the Buyer to ensure its viability, the Ad Hoc Term Lender Group and Peak discussed the consideration to be provided to the Prepetition Lenders, including the Ad Hoc Term Lender Group, at Sale close in exchange for the contribution to the Buyer of the loans under the Credit Agreement and the credit bid.

Peak’s position is fundamentally inconsistent with the entire premise of the Sale and the mechanics of how the consideration works thereunder. This Court should, therefore, temporarily enjoin the closing of the Sale until the Court can clarify the Sale Order for the benefit of all parties. First, there is a likelihood of success on the merits because the Asset Purchase Agreement is crystal clear that, as a condition to closing the Sale, the Buyer must deliver the purchase price thereunder, which includes the credit bid, as consideration to the Debtors. The Agent, the party with the right to credit bid on behalf of the Prepetition Lenders, has not contributed the credit bid or anything else to the Buyer, and there is no assertion to the contrary. The simple fact is that the Buyer does not now have, and never has had, any right or entitlement to credit bid the loans under the Credit Agreement. The Buyer holds no prepetition debt of the Debtors to even facilitate a credit bit. As a result, the conditions to closing the sale under the Asset Purchase Agreement cannot be met."

The Court denied the Ad Hoc Term Lender Group's emergency motion on November 30, 2020 [Docket No. 721] witht he order stating, "(i) the Motion is denied for the reasons set  forth  on the  record;  and  (ii) pursuant  to  paragraph  X  of  the  Sale  Order,  the Prepetition Agent, on behalf of the Prepetition Lenders, has transferred the right to credit bid the Credit Bid Consideration to the Buyer, and the Buyer is authorized to contribute the Credit Bid Consideration at closing of the sale."

Liquidation Analysis (see Exhibit B of Disclosure Statement [Docket No. 549] for notes)

About the Debtors

According to the Debtors: “Town Sports International Holdings, Inc. (the ‘Company” or “TSI.), is a diversified holding company with subsidiaries engaged in a number of business and investment activities. The Company’s largest operating subsidiary, TSI, LLC, has been involved in the fitness industry since 1973 and has grown to become one of the largest owners and operators of fitness clubs in the Northeast region of the United States. TSI’s corporate structure provides flexibility to make investments across a broad spectrum of industries in order to create long-term value for shareholders. Town Sports International is led by its Chief Executive Officer and Chairman of the Board, Patrick Walsh.”

As of December 31, 2019, the Debtors owned and operated 186 fitness clubs and collectively served approximately 605,000 members.

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