(Bloomberg) — A lender to New York Sports Clubs sued the investment firms that took partial control of the gym chain through bankruptcy, claiming the Chapter 11 plan arranged by the new owners left the gym chain financially shaky and the lender’s stake essentially worthless.Kennedy Lewis Investment Management said in court papers filed Tuesday that its loan to Town Sports International LLC was unfairly converted into a minority stake by the new owners, and some of its holdings were frozen out entirely. What’s more, the gym was re-launched without the financial backing that had been promised, according to Kennedy Lewis, which said its recovery value had been “destroyed.”The federal suit filed in Manhattan claims that Abry Partners LLC and other lenders breached credit and security agreements last year after Town Sports went bankrupt. Apex Credit Partners, CIFC Asset Management, Ellington Management Group, Trimaran Advisors Management, and Wilmington Savings Fund Society, as administrative agent on the loan, were also named.A lawyer for the defendants said the lawsuit got the facts wrong and has no legal merit.Pandemic ClosureTown Sports, the operator of New York and Boston Sports Clubs, shut its fitness centers in March 2020 at the height of the pandemic. Unable to pay its bills, the company filed for bankruptcy in September.Kennedy Lewis and the defendants were originally part of the same lending syndicate to Town Sports. According to the lawsuit, the defendants split off into an ad-hoc group and worked out a plan to buy the gym chain’s assets and operations, with the business owned 80% by Houston-based Tacit Capital and the rest by the syndicate lenders.The ad hoc lenders agreed to use $80 million of the syndicate’s $167 million loan as currency to support their portion of the bid, with the restructured company issuing new debt instruments to the syndicate. Tacit would contribute $47.5 million to make the revived gym chain viable.The deal erased the syndicate’s previous liens, so the only recovery available to members such as Kennedy Lewis was through the syndicate’s 20% stake in the new entity, according to the lawsuit. The remainder of the syndicate’s loans weren’t part of the credit bid and thus “would be rendered essentially worthless.”Broken PromisesBut according to the complaint, the ad hoc group didn’t have the authority to contribute the $80 million. Meanwhile, Kennedy Lewis claims, they didn’t draw up binding agreements to compel the new entity to issue the new debt instruments or Tacit to make its contribution, in addition to other flaws.Tacit ultimately dropped out — replaced by a new firm that contributed only $5 million — and the reorganized gym chain never issued the promised debt instruments to the syndicate. The company that emerged from court protection was so financially shaky that it might have to return to bankruptcy, the lawsuit claims.The defendants, “realizing the gravity of the situation that they had created,” tried to abort the sale with an emergency motion, an effort that ultimately failed, Kennedy Lewis claimed. The fitness chain was sold to investors including Peak Credit, an affiliate of New York-based investment bank Lepercq de Neuflize & Co.Read more: N.Y. Sports Clubs Owners Seek New Money Amid Gym Cash Crunch“As a result of the defendants’ conduct, the recovery value to the syndicate lenders, including the plaintiffs on the secured loans to the borrower, has been destroyed,” the complaint claims.A representative for Kennedy Lewis declined to comment beyond the filing. Gibson Dunn & Crutcher partner Mary Beth Maloney, a lawyer for the defendant lenders, called the lawsuit “factually wrong, legally meritless and jurisdictionally improper.” The dispute belongs in Delaware Bankruptcy Court, she said in an emailed statement.“The complaint is nothing more than a belated attack on orders entered at the height of the Covid-19 pandemic by Judge Christopher Sontchi of the Delaware Bankruptcy Court,” Maloney said. “Our clients intend to seek damages from Kennedy Lewis for this unfounded attack.”The case is Kennedy Lewis Partners Master Fund LP v. Abry Partners LLC, 21-cv-4690, U.S. District Court, Southern District of New York (Manhattan).More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.