December 4, 2008 1:16 PM

Bankruptcy Report: Gyms, Pharma Firms Not Immune

Posted by Zach Lowe

Maybe Jamie Sprayregen was on to something when he bolted Goldman Sachs to return to his old perch atop the bankruptcy department of Kirkland & Ellis.

The bankruptcy wave Sprayregen said he saw isn't stopping, and two Wednesday filings show it's going far beyond the world of struggling retailers like Steve & Barry's, Circuit City, Sharper Image and others (most of whom have retained Weil, Gotshal & Manges).

Even gyms, it turns out, can't stay afloat in the current economy. Bally Total Fitness filed for Chapter 11 Wednesday for the second time in a year, this time retaining Kramer Levin Naftalis & Frankel's Kenneth Eckstein to lead the reorganization effort. Eckstein is co-head of Kramer's corporate restructuring team.

Bally used both Latham & Watkins and Kasowitz Benson Torres & Friedman during bankruptcy proceedings last year, when they were saddled with more than $800 million in debt and had just $45 million cash on hand, according to this Associated Press recap.

Eckstein did not return a call seeking comment about the case.

Bally emerged from Chapter 11 when Harbinger Capital Partners rescued the fitness chain with a $233 million investment and took the company private. But the debt situation hasn't improved, which is why Bally is headed back to bankruptcy court.

One interesting nugget: Jenner & Block is listed as Bally's fourth-largest creditor, with a claim topping $1.7 million that Bally characterizes as "disputed" in its court filing. It's pretty common for law firms to be among a bankrupt company's creditors, but they are seldom listed so high on the list. We checked with Jenner's Daniel Murray, chair of the firm's bankruptcy practice group, and he says the listing is incorrect--Jenner is not a creditor in the case. The firm does, however, represent two former Bally execs, ex-chief executive Lee Hillman and John Dwyer (former chief financial officer), who claim Bally owes them the $1.7 million, Murray says.

Speaking of law firms being owed money, yesterday's other corporate bankruptcy was filed in Austin, Texas, where Introgen Therapeutics, a 15-year-old drug-development company that has never turned a profit, threw in the towel and filed for chapter 11 protection.

Introgen apparently pinned its hopes on the gene-based cancer-fighting drug Advexin, but the U.S. Food and Drug Administration denied the company's application to sell and market the drug last year, according to this story in the Austin American-Statesman. (European regulators have approved it).

The company's debt-to-assets ratio is ugly; its filing lists $9.1 million in assets and $12.9 million in liabilities, and it laid off one-third of its 45 employees last week, the American-Statesman says.

Wilson, Sonsini, Goodrich & Rosati is listed as the top creditor (with a claim of $363,733.15), and Fulbright & Jaworski checks in at number five ($172,627.95).

Introgen retained Patricia Tomasco from the Austin office Brown McCarroll as lead bankruptcy counsel. Tomasco did not immediately return a phone call seeking comment.

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