January 21, 2016 / 7:09 PM / 2 years ago

Monday ruling decides fate of Dov Charney deal for American Apparel

Dov Charney speaks during a May Day rally protest march for immigrant rights, in downtown Los Angeles May 1, 2009. REUTERS/Mario Anzuoni

WILMINGTON, Del. (Reuters) - A U.S. judge will decide on Monday whether teen retailer American Apparel can exit bankruptcy under the control of hedge funds or if he will allow a takeover bid by investors working with its controversial former chief executive, Dov Charney.

Los Angeles-based American Apparel Inc, known for its “Made in the U.S.A.” fashion and sexually charged advertising, wants approval for a bankruptcy-ending deal that would cede control to hedge fund bondholders, including Monarch Alternative Capital.

Charney has challenged that deal, and wants U.S. Bankruptcy Judge Brendan Shannon to reject the company plan and allow his partners to pursue their $300 million takeover. That bid is backed by two investment funds, Hagan Capital Group and Silver Creek Capital Partners, but was recently rejected by the company’s board.

Shannon said after two days of testimony he would rule at 11 a.m. ET on Monday. The judge has to determine if the company plan, which was approved by the company’s creditors, was fair and feasible.

The company blamed its October bankruptcy on a shift in shopping habits, too much debt and inventory and lawsuits tied to Charney’s volatile tenure as CEO.

Charney testified for two hours in an attempt to show the company was wrongly refusing to consider his offer.

Charney seemed to relish the story of founding the company as a teenager and expanding it into a publicly traded corporation that employed thousands. He still seemed incredulous over his firing.

Charney, wearing a gray jacket and slacks and white sneakers, testified that the board “blackmailed” him in mid-2014 by offering a multi-million dollar severance if he surrendered his large minority stake and left. If not, he faced “character assassination.”

In December 2014, he was fired for allegedly misusing company funds and failing to stop a subordinate from defaming former employees. He has denied the allegations.

A lawyer for American Apparel said the company disagreed with “just about every word” of Charney’s testimony.

“I am fully cognizant that there are two sides to this story,” said Shannon, the judge.

Charney also detailed how the American Apparel board repeatedly gave him and his backers the runaround rather than considering their deal proposals.

“It is impossible now and it was impossible then,” he said.

Gerard Uzzi, a lawyer who represents the hedge funds, said it was obvious Charney’s loss of control was “very traumatic.” He called Charney’s bid effort “a transparent last-minute plea to re-enter the company.”

Reporting by Tom Hals in Wilmington, Delaware; Editing by Bernard Orr and Dan Grebler

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