CHICAGO – Liberation Investment Group, the second-largest shareholder of Bally Total Fitness which last month threatened to sue Bally over its pre-packaged Chapter 11 reorganization plan, has come up with an alternative reorganization plan.

In a filing with the Securities and Exchange Commission released today, Liberation, along with fellow shareholders Harbinger Capital Partners, spelled out its plan in which the shareholders would get 10 percent of the reorganized equity and rights to participate in an offering for an additional 10 percent of the equity. Also, Harbinger will backstop the rights offering and own 80 percent of the reorganized equity. Bally’s senior subordinated noteholders would receive $60 million in cash instead of reorganized equity.

In a letter to Bally, Andrew Glenn, an attorney representing Liberation and Harbinger, wrote that this new plan “undeniably is superior to the Bally plan” and incorporates many of the same terms as Bally’s plan. The shareholders’ plan will basically end the threat of litigation that “inevitably will result should the company continue to prosecute the Bally plan,” Glenn wrote.

Bally, in a press release, said it is in discussions with the shareholders and will provide due diligence access to the shareholders, subject to the execution of confidentiality agreements. The shareholders have agreed to complete their due diligence and proposed documentation by July 20.

Bally’s noteholders have until July 27 to vote for Bally’s reorganization plan, for which holders of 63 percent of its senior notes and more than 80 percent of its senior subordinated notes have signed a restructuring support agreement.

After Bally first laid out its restructuring plan May 31, in which Bally’s stock would extinguish and the company would become private (thus giving power to the noteholders and basically freezing out the shareholders), Glenn wrote a letter to Bally on behalf of Liberation, which strongly disagreed with Bally’s proposal and said the plan was not in the best interests of the shareholders.