American Apparel Inc. founder Dov Charney may start a new clothing business after a bankruptcy judge eliminated his best chance to regain control of the company he started in college.
The judge on Monday approved a reorganization that hands the company to senior lenders, shutting out Charney’s alternative proposal. The lenders, including Monarch Alternative Capital LP, will trade their debt for control of the retailer, reducing its liabilities by about $200 million. American Apparel’s woes reflect broader challenges in the retail industry.
Charney, who was thrown out in 2014, was backed by investors who claimed to have a $320 million takeover plan. U.S. Bankruptcy Judge Brendan Shannon in Wilmington, Delaware, rejected that proposal and Charney’s claim that the company would fail without him. Charney hired an adviser in December 2015 in an attempt to regain control of the company.
Los Angeles-based American Apparel filed for protection from creditors in October. The company, known for its made-in- U.S.A. marketing and racy advertising, posted losses every year since 2010. Its troubles were compounded by allegations of misconduct against the founder, which he denies. Charney was unapologetic after Monday’s ruling.
“I did the best that I could,” he said in an interview. “They threw me out and made it worse.”
Charney’s financial supporters said he will return, with their help.
“We are backing Dov on a new venture,” said Chad Hagan of Hagan Capital Group. “We will keep an eye out on American Apparel and see what happens with the brand. Ideally, if we can pick it up down the road, we will.”
He said the new venture will be a direct competitor to American Apparel and that plans for it are concrete, but wouldn’t comment further. Charney accused American Apparel management of leading the company down a “road to ruin.”
“Part of me can scarcely believe that a court could confirm their plan as feasible given the operating performance of the business under their management,” he said in a statement. “Stay tuned.”
Since his ouster in 2014, Charney has been looking for a way back in. He teamed up with Hagan and Silver Creek Capital Partners to assemble the alternative takeover offer. Shannon wasn’t swayed by it, saying he found in it no “meaningful alternative” to the company’s preferred plan.
The judge said the Bankruptcy Code forced him to reject Charney’s objection to American Apparel’s plan, in part because the board was turning the company over to the senior lenders through a traditional reorganization, not an auction.
In such a situation, creditor votes matter more than efforts to find a buyer, according to the judge. If the board was simply trying to sell American Apparel’s assets to the highest bidder, Shannon said, he probably would have ordered the company back to the negotiating table.
Shannon said shareholders, including Charney, would be wiped out by the plan, because the company wasn’t worth enough to leave anything for them. In bankruptcy, shareholders can’t collect until all creditors have been paid in full.
Charney lost mainly because his backers were unwilling to financially commit themselves to a protracted fight with the senior lenders. The judge noted that Hagan testified he was close to getting a $50 million, asset-backed loan but didn’t have a binding commitment.
Shannon said Charney’s complaints boiled down to a simple claim, which the judge rejected -- that the only way American Apparel could succeed was “under his leadership.”
American Apparel has a guaranteed $40 million loan it can use when it exits bankruptcy and another $40 million in new debt and equity provided by the lenders who are taking the company. The new plan will decrease interest payments by $20 million, the company said in a statement.
“This is a new day for the company, and a positive outcome for our customers, vendors and employees,” American Apparel CEO Paula Schneider said in a statement. “With this milestone behind us, we are now fully focused on executing our turnaround strategy.”
The case is In re American Apparel Inc., 15-12055, U.S. Bankruptcy Court, District of Delaware (Wilmington).