The company that runs two Crunch Fitness locations in Cambridge is being accused by lawyers overseeing a restructuring process of “robbing Peter to pay Paul” in order to ensure the business stays solvent.
Crunch Fitness maintains it did nothing wrong and operated within the guidelines of a court order issued as part of restructuring attempts.
The issue came to light when several local members expressed concern that their monthly membership dues were being taken out of their accounts and charged to credit cards while the gyms remained closed due to the provincial lockdown.
Karen Bartlett, a Cambridge realtor, who is a member at the Holiday Inn Drive club, noticed the monthly membership charge on her most recent credit card statement and took to Facebook last week to ask if anyone else had been charged the membership fee.
Local members quickly flooded her post with comments, with many saying they had experienced greater losses than she did.
“They can’t continue to take funds out during a stay at home order. It’s not right,” she said.
Some, including Bartlett, have since filed complaints with the province under the Consumer Protection Act.
Others were told by the company that it was a computer glitch.
But she says friends of hers own a gym and say there’s no way it’s a glitch.
“You literally have to turn on that system,” she said.
Bartlett hopes greater exposure of the issue will make people think to look at their bank or credit card statements more closely.
But the issue appears to be much more complicated than a computer glitch.
Numerous efforts to get comment from Crunch were unsuccessful, but court documents tell the story so far.
Trouble for the Crunch Group, which includes numbered and named Ontario companies from Windsor to Orillia, began in March when the Bank of Montreal applied under the Bankruptcy Protection Act to place the company into receivership due to over $1 million in unpaid debt.
Wesley Hodgson and David Charles Murray Middlemost are behind Crunch Group, operating 16 gyms in leased locations throughout southwestern Ontario, including the two Cambridge locations.
Crunch Group came to an agreement with the bank to adjourn the receivership application while the company attempted a restructuring that involved buying back a portion of their debt for a minimum agreed price. The stipulation came with an April 29 deadline.
So, in early March, Hodgson and Middlemost formed a new company – ManagementCo – and through it submitted an offer to acquire all the debt. Theirs was the only offer to come in on deadline, but it was short on funds, according to BMO's lawyers.
Another company also submitted a bid.
Part of the process included a court issued appointment order in which Crunch Group had to remain in possession of its property, carry on business as usual and “not take any steps outside of the ordinary course of business to dissipate the property.”
Richter Advisory Group was hired to oversee the process.
Richter’s lawyers now claim in court documents that instead of heeding the order not to take steps outside the ordinary course of business, the company "misappropriated funds" by billing member fees to help float the debt purchase.
On May 16, approximately $403,062 was received by Crunch Group in the form of membership fees from across the chain that were charged despite the clubs being closed and service not available to members.
Crunch Group told its members the fees were accidentally charged and sent emails to some stating its billing software had recently been upgraded and may have caused members to be billed during their closure. They would either receive a refund or be able to apply it to fee payments when the clubs reopened, court documents detail.
Crunch Group admits a portion of funds collected in member fees went to fund the closing bid purchase on the debt.
Richter’s lawyers claim ManagementCo also used funds collected through the federal government’s Canada Emergency Rent Subsidy program (CERS) to acquire its controlling debt position with the bank.
At least one of their landlords has since initiated a trust claim to get their money back, the court document says.
Richter’s lawyers say neither the Crunch Group, nor ManagementCo, attempted to amend the appointment order prior to the transfers, thereby breaching the terms of the appointment order.
They say an attempt by ManagementCo to characterize the transfer of funds as a “short-term loan” in the best interest of stakeholders, is misleading.
The lawyer acting on behalf of Crunch Group and ManagementCo, however, says the transfers were to secure the operation, protect 500 jobs and provide the necessary capital to go forward.
The move was “not inconsistent with the spirit of the appointment order,” the lawyer says, because the funds were being used for ordinary course purposes in securing the ongoing operations.
Richter's lawyers concluded that just because Crunch Group and ManagementCo thought the move to “flout” the order was in the best interest of stakeholders, allowing it to happen would “render court orders entirely meaningless and import chaos into their enforcement.”
Court documents indicate that there is now some concern those funds could be held in creditor protection should the restructuring fail.
Richter’s lawyers have agreed to allow the process to run its course, giving both companies who submitted advanced bids a chance to submit their “best and final bids.”
The June 6 court document also recommended all transfers to ManagementCo, including member fees and CERS money, be refunded and not be used to secure the company’s bank debt.
Those funds are currently being held in trust.
