LOS ANGELES – American Apparel Inc. will reorganize under a plan put forth by its executives, a bankruptcy judge ruled Monday, dashing the plans of founder Dov Charney, who had hoped to return to the company’s leadership.
The decision puts the Los Angeles-based clothier one step closer to exiting bankruptcy protection. Charney said he does not plan to appeal the ruling.
American Apparel, which filed for Chapter 11 in October, backed a reorganization plan that would take the company private and hand nearly 100 percent control to its largest bondholders. Shareholders, including Charney, would be left with nothing.
Last week, Charney and American Apparel’s executives faced off in court in Wilmington, Del., in a two-day hearing to try to convince the judge that their plans are in the best interest of the Los Angeles company and its creditors.
Charney supported an investor group including Hagan Capital Group that submitted two takeover offers in recent months, including a $300 million bid that was rejected by American Apparel’s board.
The Hagan group favored returning Charney to the company. He was fired in 2014 after an investigation uncovered allegations of misuse of company funds and inappropriate behavior with employees.
Paula Schneider, who took over as chief executive last year, testified Wednesday that the board decided to reject the offer because its creditors didn’t support it.
When reached by telephone, an emotional Charney declined to comment beyond a prepared statement.
In his emailed statement, he said he is “obviously disappointed” by the judge’s decision. He said he plans to continue pursing litigation against American Apparel and Standard General, the hedge fund with which he originally partnered to try to regain control of the company, but which ultimately did not back his return.
“This outcome is one that I have been working tirelessly to avoid for nearly two years in an effort to protect value for all of the company’s various stakeholders,” he said in the statement. “Now all stockholders will have their shares and value extinguished.”
He alleged that Standard General and senior lenders “carefully orchestrated a strategy” to pass control of American Apparel to the bondholders without “exposing it to fair market test or bidding.”
Bankruptcy Court Judge Brendan Shannon said the company’s plan garnered “more than sufficient votes” from its creditors. He said the plan also wipes out debt, provides “modest but meaningful” payment to unsecured lenders and provides the company with a line of credit to “ensure liquidity going forward.” He rejected Charney’s request to delay a final decision to take a closer look at the takeover bid.
Shannon said the takeover bid would have required approval from American Apparel’s bondholders, which already support the reorganization plan.
“The debtors pursued said confirmation of their plan and received approval from every stakeholder in this case,” Shannon said in a conference call to issue his ruling. “I will not second guess the debtors’ decision.”
Shannon also rejected Charney’s request to reconsider the balloting process in which creditors voted to approve the reorganization plan.
“I have no doubt that (Charney) wants only the best for American Apparel and especially for its thousands of employees,” Shannon said. But “Mr. Charney’s objection to the confirmation are overruled.”
In testimony Thursday, Charney said he has tried to take back the company multiple times since his ouster, but he said he was stopped by an “impossible” board.
“There’s no chance I can ever have a fair shot,” he said.
Under the reorganization agreement submitted by American Apparel, more than $200 million in bonds would be eliminated in exchange for shares in the reorganized company – a transaction known as a debt-for-equity swap. The participating lenders are led by hedge fund Monarch Alternative Capital.
Monday’s ruling will leave American Apparel a private company in need of significant changes.
The clothier has not turned a profit since 2009. A yearlong turnaround implemented by Schneider has failed to boost its sagging sales. In November alone, the retailer reported a net loss of $14.5 million, according to its monthly operating report.
After the ruling, American Apparel said in a statement that it is now “focused on exiting Chapter 11 and fully implementing its strategy.”
That strategy includes launching new products and designs, boosting revenue and creating new marketing campaigns, Schneider said in the statement.
Andrew Herenstein, co-founder of Monarch Alternative Capital, which will be one of the owners of American Apparel after it exits bankruptcy, said Monarch is “pleased” that the plan has been confirmed.
We “look forward to continuing to partner with the company’s management team and all its stakeholders to build a better and stronger American Apparel,” he said in the statement.
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