Industry experts recall the beginning of the health club industry boom in the 1970s as an almost lawless time, with few rules governing the business practices of club owners and operators. It wasn't uncommon for a prospective client to hand over a wristwatch as collateral when agreeing to a membership. As health club laws were enacted, some club operators who had shady dealings were banned from certain states and were told they couldn't do business there for the next two or three years, says Rick Caro, an industry leader and president of the consulting company Management Vision. Caro says the club industry's reputation today is improved, if only slightly.

“If you trace it back five or 10 years, we were often No. 2 or No. 3 behind used car salesmen in terms of complaints for bad business practices,” Caro says. “Today, we're much lower in the list. We still might be in the top 20, but we're not No. 1 or No. 2 the way we had been.”

However, the business practices of club owners and operators are still under scrutiny by the public, the media and government agencies. Some recent headline-grabbing cases involving health club owners may have some people thinking that the industry hasn't come far enough since the 1970s.

Both New York City and the state of New York has had its share of misgivings involving the club industry. An article in the June issue of the Harvard Business Review cites an investigation by the New York City Council a few years ago. The council concluded that 41 percent of clubs in the city didn't explain their fees in writing, 81 percent didn't give potential members a contract to read at home, and 96 percent didn't inform customers of all the ways they could legally cancel a contract. Gail McGovern and Youngme Moon, the authors of the magazine article, also report that the U.S. Better Business Bureau receives thousands of complaints a year about the health club industry, putting it in the top 1 percent for the volume of complaints received.

Bally Lows

Perhaps the most well-known case of bad press involving the fitness industry relates to the negative publicity that Bally Total Fitness has received in the past few years. Bally was taken to task in a 2001 investigation by then-New York Attorney General Eliot Spitzer for its sales and marketing practices. Bally settled in 2004, agreeing to improve its cancellation policies, monitor compliance with them and make restitution to customers.

Late last month, the company announced it would restructure through a Chapter 11 bankruptcy filing. The restructuring comes after years of growing debt, changes in accounting procedures that delayed financial filings with the Securities and Exchange Commission (SEC) at least two times, an investigation by the SEC into accounting practices of the chain, the resignation of two CEOs, an internal investigation that blamed former executives for accounting issues, and a delisting from the New York Stock Exchange after Bally's stock dropped below $1. (For more on Bally's recent news, see page 8.)

A recent self-published book by a former Bally trainer, Richard Thomas, also makes claims about operating practices at Bally clubs. In his new book, “Fat Power: A Former Bally Total Fitness Employee Ventures into the Corrupt Gym,” Thomas claims that Bally “is a criminal enterprise.”

Thomas worked at a Bally in Brooklyn, NY, for 13 weeks in 2004. During that time, Thomas, who was a boxer but had no prior experience as a personal trainer, says he was told selling as many memberships as he could was more important than training clients.

“The supervisor told me, ‘We don't care how good of a personal trainer you are. We just care how many contracts you bring in,’” Thomas says.

Thomas's supervisor was Kevin Mathieu, a Bally fitness director who has been an employee of the company for the last eight years. In the book, Thomas questioned Mathieu's business practices. He alleges that Mathieu told a client that Bally only took checks if the full amount was paid. When the client said she didn't have the full amount in her account, Mathieu allegedly responded, “How much money do you have in your bank account?”

In another instance, after a client fainted during a workout, Mathieu allegedly told the rest of the trainers at a staff meeting, “It's good when a client faints; it gives them an incentive to buy personal training sessions.”

Mathieu denies any and all allegations made by Thomas.

“Absolutely not. Incorrect. No way,” Mathieu says of Thomas's claims. He added that Thomas was unproductive and “wasn't a good hire,” but he wished Thomas well.

“He's a very smart individual, very intelligent,” Mathieu says. “He wasn't ideal for the position.”

Thomas also questioned Bally's $19 down, $19 a month advertisement, which attracted a lot of customers. Thomas says that the deal only applies for members who sign up for three days a week and are only permitted to use the gym during off-peak hours. Otherwise, the cost to go anytime and to any Bally location is $3,000 for three years, Thomas says.

Thomas had other issues during his employment at Bally and sued the company for $175,407.50 in back pay, overtime and punitive damages. The case went to the New York State Supreme Court, which upheld previous rulings in favor of Bally.

Matt Messinger, spokesperson for Bally Total Fitness, says he has not seen Thomas's book and cannot comment on it or the allegations in it.

Butera Brothers

Sometimes the practices of smaller club owners also catch the glare of the media spotlight. Take the case of Manny Butera, who at one time was the largest World Gym franchisee in the world. Today, at least 10 lawsuits have been filed against Butera and his business operations, a number that Caro calls highly unusual for one club owner. Butera filed for Chapter 11 bankruptcy protection in December and personal bankruptcy in April.

Financial troubles forced the 17-year fitness industry veteran to close five clubs in Georgia, three clubs in Tennessee and two presale locations in Huntsville, AL. Butera, who once owned 16 clubs and managed 35 others, now owns six clubs renamed as Fuel Fitness, headquartered in Brentwood, TN. His management company, Total Fitness Systems, now manages one club in Texas.

“My investors pulled out of the deal in December of 2005 right after we were unable to secure the purchase of World Gym,” says Butera, who had tried to purchase the franchise business prior to it being sold to Planet Fitness last October. “We didn't have enough capital to keep everything afloat.”

Two of Butera's largest creditors — United Leasing and Leaf Funding Inc. — filed suit to recover the losses on defaulted equipment leases. United Leasing sued Butera; his wife, Jennifer Butera; and his former business partners, Brian and Tacy Ball, and Dirk and Robyn Parkinson, for more than $1 million for allegedly defaulting on four equipment lease agreements for clubs in Tennessee.

In turn, the Balls and Parkinsons sued Butera. In a February filing with the Nashville division of the U.S. District Court, the Parkinsons allege that Butera forged signatures on lease documents and used their financial statements to take advantage of their names and credit without their knowledge or consent. The case is now in the discovery phase, says Larry Ahern, a Nashville attorney representing United Leasing in the lawsuits.

Leaf Funding Inc. sued Butera and his business partners for failing to make lease payments, failing to insure the property and improperly moving or transferring equipment, according to an Oct. 13 filing with the U.S. District Court, Middle District of Tennessee.

Leaf Funding Inc., which estimated its damages at $2.9 million, signed a master lease agreement with Butera, Jennifer Butera, Brian Ball and Dirk Parkinson in May 2005. The creditor financed 710 pieces of fitness equipment but initially only recovered 250 pieces of equipment after Butera closed the clubs in Georgia.

Later, the equipment was discovered in three locations in Huntsville, AL, (a storage unit, a presale space and a large warehouse) and at a World Gym in Leamington, Ontario, Canada, owned by Butera's brother, Rick Butera, and other business partners.

As part of a contractual arrangement between Star Trac (the manufacturer of the equipment) and Leaf Funding, Star Trac repossessed the Leaf-financed equipment in both cities in January, according to an April filing with the U.S. Bankruptcy Court. In April, the U.S. Bankruptcy Court authorized the sale of the leased equipment.

Butera says the leased equipment from his club in Duluth, GA, was transferred to his brother's World Gym in Leamington after the Georgia club closed in May 2006. However, in court documents, Leaf Funding asserts that it was not aware that the equipment had been moved across international borders until after it had been transferred to Canada. Butera says he made every effort to restructure the equipment leases with Leaf, but it fell on deaf ears.

“We told them that we were heading down a path that wasn't sustainable,” he says.

Although Rick Butera and Manny Butera are brothers, they run separate operations, Butera says. In fact, World Gym required Rick Butera to sign an agreement stating that Manny Butera would not have any involvement with investing or consulting for his World Gym in Leamington. Manny Butera had operated his facilities as World Gyms for several years, but in November, World Gym broke ties with him.

“It was mutual but forced upon us,” Chris Rondeau, the CEO of World Gym, says about the split. “We didn't like the ethics and background of the person in charge, and we decided not to have him associated with World Gym because of the business ethics behind him.”

At this time, World Gym plans to continue its contract with Rick Butera, Rondeau says.

Peak Problems

A stone's throw away in a neighboring state from the Fuel Fitness headquarters is Peak Fitness, a growing chain in the Carolina region which had 14 clubs at the beginning of 2006. By the end of the year, Peak Fitness, run by Fitness Management Group Inc., Charlotte, NC, acquired 13 more clubs and opened seven others.

In July 2006, Peak Fitness bought eight Capital Fitness Spa Health Clubs, which had been operated by former Capital Fitness Chief Executive Officer Rick Quinn. In late 2005, Capital Fitness assessed a $25 “upfit” fee to its members who had already paid their monthly, annual or lifetime dues. In a letter to members, Capital Fitness explained that the fee would help pay higher electric bills and $1.5 million in club upgrades. With 40,000 members at the then-six Capital Fitness clubs, the $25 fee could have generated a cool$1 million. Quinn said members were not given enough notice about the added fee, and after several objections and complaints, Capital Fitness backed off on its additional fee.

“When we did this, we knew we were going to get questions and a bit of controversy,” Quinn told the Raleigh News & Observer in December 2005. “All we're trying to do is make sure we're here, that we're here long term.”

The Beyond Fitness clubs that Peak Fitness acquired in 2006 received much more criticism. Beyond Fitness, which changed its name to So Fit before the Peak Fitness takeover of its five clubs, was at the center of an investigation by the TV station ABC11 in the Raleigh/Durham, NC, area. The investigation found mold at one gym and broken equipment at each of the four gyms that ABC11 visited.

ABC11 reporter Diane Wilson attempted to talk to Randall Rohm, the owner of the facilities at the time. With the camera rolling, Wilson approached Rohm in the parking lot of a Beyond Fitness, but he denied he was Rohm, instead saying that he was “Craig.” Later, the reporter says Rohm acknowledged that he was the man she spoke to in the parking lot. However, his lawyer and he later denied that again. Two former Beyond Fitness employees identified the man in the parking lot as Rohm, Wilson says.

In a statement to ABC11, Rohm said that several of the clubs had been painted, equipment had been updated and sanitary conditions were being improved.

“As you know, 70,000 members are not always neat and tidy,” Rohm said in the statement.

Prior to the sale of Beyond Fitness to Peak Fitness, the North Carolina Attorney General's office received more than 350 complaints for all the Beyond Fitness clubs over a three-year period, according to the TV station, and the Better Business Bureau listed the club with an unsatisfactory record, with more than 200 complaints during that time. The clubs drew consumer complaints related to deceptive advertising, unsuitable facilities and equipment, improper billing, failure to pay refunds, bounced checks, and collection practices.

Rohm also allegedly took money upfront for dozens of pre-paid memberships for a planned location that never opened. The North Carolina Attorney General's office recovered more than $50,000 in refunds for 182 consumers.

The North Carolina Attorney General's office filed a lawsuit against Peak Fitness in March for issues related to the former Beyond Fitness clubs and for issues related to the current club. Attorney General Roy Cooper alleges that both Rohm and the current owner, Jeff Stec, sold pre-paid contracts without state-required bonds, which are used to pay refunds if a club goes out of business.

Also in the lawsuit, Cooper says Peak Fitness displayed a newspaper advertisement that he said was misleading. The ad claimed that members could access any of the 34 Peak Fitness clubs for $19.99 a month. In the fine print below the price, the ad stated that certain restrictions applied, based on a 24-month paid-in-full membership. Rather than paying $19.99 a month, consumers were required to pay $479.76 at the time the contract was signed.

Peak Fitness agreed to remove the ads despite insisting they were not misleading. The company did not have any members complain about paying for the two-year membership that was advertised, says Ken Hanley, the CFO of Fitness Management Group Inc.

“You have the option to do it or not do it,” Hanley says. “It's not like they get six months into the deal and realize, ‘Oh, wait a minute. I'm being overcharged.’ The fine print isn't like you see on a lot of these car dealers that put it where you can't see it without a magnifying glass. It was completely legible.”

The lawsuit was still in the discovery phase as of the end of May. Noelle Talley, a spokesperson for Cooper, says the goal of the attorney general's office is to protect consumers.

“We want to make sure that consumers who are going to these facilities are getting what they pay for, and consumers who respond to these ads get what was promised to them,” Talley says. The attorney general's office also is working to ensure that dissatisfied former members of the former Beyond Fitness clubs now being operated by Peak Fitness receive refunds.

“The ownership and operation with these clubs has been very confusing, and that's one of the things we're seeking through the discovery process to get enough information so that we can find out exactly who owned what club and who operated what club at what time,” Talley says. “That's why we eventually resorted to going to court because we just weren't able to get the satisfaction for these consumers that they deserve.”

“It's a real sore spot for us,” says Hanley. “The Beyond Fitness club, we knew they had some issues with the attorney general's office and some member complaints but certainly had no idea how bad it really was. Now that we've acquired the Beyond Fitness chain, [former Beyond Fitness members and the attorney general's office] finally have somebody they can get to, more or less. The old Beyond Fitness guys scattered, and there was no way for the state to even get in touch with the individuals.”

Peak Fitness is trying to distance itself from Rohm, Beyond Fitness and the troubles that occurred under Rohm's watch. Hanley says Peak Fitness has taken on about 20 outstanding complaints with the Department of Justice from under Rohm's ownership.

“It's similar to going and buying a used car,” says Ian Byrne, a Charlotte lawyer representing Peak Fitness. “Someone owned it before you, but you're not responsible for it if it ran somebody over when someone else had it. Peak doesn't assume liability for anything that Beyond did. They're not responsible for any of Beyond's obligations.”

Hanley says Peak Fitness, which opened its first club in 1999, will continue to expand, with plans to open five more clubs this year.

Better Days Ahead

Despite the issues that these club owners and others face, owners are making a more conscious effort to be more open with consumers about their business practices, the Harvard Business Review article says. The magazine cites Life Time Fitness's 30-day money-back guarantee and the pay-as-you-go options offered by clubs such as Curves and 24 Hour Fitness as examples of better business practices in the industry.

“More and more club operators realize that the proper and ideal way to run the business is on a monthly dues basis with very few dollars pre-paid upfront,” Caro says, “which puts much more pressure on the businessman to have a better business plan to start with and a better understanding of how the business will operate.”

Caro points out that club operators are also doing a better job of capitalizing the business at the outset and are improving business skills by raising money through proper sources. Landlords of club facilities are asking for tougher terms in terms of collateral and guarantees, Caro adds.

“With 29,000 commercial clubs, you're always going to have some people who don't behave and at worst, violate laws,” Caro says. “But I think it's less true of the industry than ever before. I think we're much better business people than we were previously.”