Settled or Not? Town Sports Challenges Settlement it Purportedly Entered into with New York Attorney General
On March 10, 2021, the parent company of sports club and gym-operator Town Sports International, LLC, filed a motion seeking to set aside a purported $250,000 settlement agreement between Town Sports and the New York Attorney General arguing that the agreement (1) was barred by the terms of Town Sports’ confirmed chapter 11 plan and (2) in any case, not authorized by Town Sports but instead only by one of its prior attorneys.
As noted in our prior post on the case, Town Sports has been embroiled in litigation with the New York Attorney General since September 2020, when the attorney general’s office filed a lawsuit against Town Sports arguing that it improperly failed to honor certain of its members’ cancellation requests, and instead continued to assess monthly membership fees, during the disruptions caused by the COVID-19 pandemic and related government shutdown orders. The parties appeared to have settled their lawsuit on March 4, 2021, when a New York state court entered an order approving a settlement agreement, which provided that Town Sports would release a $250,000 surety bond to the attorney general. But, merely days later, Town Sports moved before the Delaware Bankruptcy Court to have the settlement agreement deemed void and unenforceable.
Like several other gym-based businesses, Town Sports filed for bankruptcy in the wake of the COVID-19 pandemic on September 14, 2020, in Delaware. On December 18, 2020, the Bankruptcy Court confirmed Town Sports’ proposed chapter 11 plan, which included a standard provision releasing all pre-petition claims against Town Sports. The plan included an express “opt-out” provision under which claim-holders could choose to opt out of the release. The plan was confirmed, however, without the New York Attorney General taking advantage of that opt-out provision, which, Town Sports argues in its motion, led to the attorney general’s claims and related settlement being barred by the confirmed chapter 11 plan.
In its motion, Town Sports also argues that, regardless of its confirmed plan, the lawyers who signed the settlement agreement, purportedly on Town Sports’ behalf, had no authority to do so. Indeed, according to Town Sports, its CEO first found out about the settlement agreement only by way of a press release issued by the New York attorney general’s office. As a result, Town Sports argues there was no mutual assent, a necessary element for any settlement agreement to be valid under New York law.
The New York attorney general’s response to Town Sports’ motion is due by March 17, 2021. And a hearing on the dispute has been scheduled for Monday, March 22, 2021.
