January 20, 2016 / 6:43 PM / in 2 years

American Apparel defends turnaround plan against Charney's bid

Workers queue for lunch in front of a poster-size photo of the first alien resident card of former company Chief Executive Dov Charney at the American Apparel factory in downtown Los Angeles, in this October 17, 2008 file photo. REUTERS/Lucy Nicholson/Files

WILMINGTON, Del. (Reuters) - American Apparel’s APPCQ.PK chief executive told a bankruptcy judge on Wednesday the retailer could become embroiled in drawn-out litigation if it accepted a takeover bid being championed by its founder and former CEO Dov Charney.

Los Angeles-based American Apparel Inc, known for its “Made in the U.S.A” fashion and sexually charged advertising, joined other teen-focused retailers by filing for bankruptcy in October due to changing shopping habits.

The company is seeking court approval of a bankruptcy exit plan backed by a group of hedge funds. Charney has objected and is trying to convince the judge a takeover backed by competing investment funds, Hagan Capital Group and Silver Creek Capital Partners, is a better deal.

Last week, the company’s board rejected the $300 million takeover bid involving Charney.

U.S. Bankruptcy Judge Brendan Shannon in Wilmington, Delaware, must decide if the hedge fund-backed plan, which has the support of a committee of the company’s creditors, is fair and feasible.

CEO Paula Schneider said the support of hedge funds that hold its bonds, including Monarch Alternative Capital, was the most critical factor in determining the best way to end the bankruptcy. She said the support of American Apparel’s bondholders was paramount.

“The affiliation with Dov Charney was not a problem,” Schneider testified.

Charney’s attorney, Steven Kortanek, repeatedly challenged the way the company’s investment banker from Moelis, Robert Flachs, reviewed the Charney-Hagan bid. The judge later called the line of questioning “effective.”

Charney founded American Apparel in 1989, but was fired in December 2014 for allegedly misusing company funds and failing to stop a subordinate from defaming former employees. He has denied the allegations.

Schneider told the court that when she joined a year ago, she found a company without cash, long-term planning or proper structure. “There was no org chart. Seventy people told me they had reported to Dov Charney.”

American Apparel has not been profitable since 2009 and the company blamed its bankruptcy in part on the cost of lawsuits linked to Charney’s volatile tenure at the helm.

Charney scribbled on a legal pad throughout the hearing and regularly passed folded notes to his attorney. He was expected to take the stand on Wednesday, but his testimony was pushed to Thursday.

“I‘m anxious,” Charney told Reuters at the hearing. “I put a lot of years into this company.”

Addition reporting by Tracy Rucinski in Chicago; Editing by Andrew Hay, Jonathan Oatis and Dan Grebler

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