American Apparel Inc. is spilling its secrets.
From how much money the company paid to people with claims of misconduct against founder Dov Charney — over $5.7 million — to how many would-be suitors were serious enough to look at its books earlier this year — 18 — the brutal efficiency of the bankruptcy process is putting American Apparel into sharper relief.
The legal filings paint of a picture of a company struggling with high debt payments that has been casting about for more funds as the still-new chief executive officer Paula Schneider races to recast the brand in what’s been a very chaotic year or so since Charney was ousted.
But the immediate path forward seems clear for the company.
American Apparel went into Chapter 11 last week with a reorganization schedule already negotiated with its top lenders: Monarch Alternative Capital, Coliseum Capital, Pentwater Capital Management and Goldman Sachs Asset Management. If bankruptcy court approves that plan, as legal experts say is likely, those investors would own 90 percent of the reorganized company.
While American Apparel is seen as well-positioned to exit bankruptcy, the company’s future beyond the next several months in the choreographed bankruptcy process remains in serious flux. It is still uncertain how long those debt investors will hold on to the company.
The creditors group told WWD though a spokeswoman: “We have made an investment in the future of American Apparel, and believe that the company’s management is well-positioned to drive a successful revitalization of the brand. As partners in the restructuring effort, we are committed to helping the company execute its transformation strategy, keeping jobs and operations here in America.”
Charney is staying mum about his plans going forward beyond stressing the importance of domestic production, although he is widely expected to try to find a partner to retake control of the company he founded and brought to prominence.
He recently noted, “The only thing I can say is that I believe in the manufacturing of clothing in a fair wage, Made In The USA environment. Vertically integrated manufacturing is the path of least resistance in terms of manufacturing valuable product that consumers want to buy. It’s also a social opportunity that interests me in terms of advancing the lives of those who are involved in manufacturing clothing.”
Experts said Charney could try to reassert himself through the bankruptcy court although he lacks the leverage that the creditors have and would have to get some serious capital behind him to secure any clear path to control of the company.
American Apparel and its creditors are due back in court Nov. 2 to have the initial orders of the bankruptcy judge formalized, giving final approval, for instance, for the company to continue to pay its workers.
“With respect to most of the orders that were entered, as long as nobody has a problem, they’re probably going to get rubber stamped,” said attorney Jasmin Yang, an associate at Snell & Wilmer in Los Angeles and a bankruptcy specialist who isn’t involved in the American Apparel case.
“They walked into the court with the lenders knowing exactly what they’re going to do,” Yang said, noting the bankruptcy process. “It’s going to go pretty fast. The gorillas in the room, with $300 million in debt, they’re already on board, so it will probably go fairly according to plan.”
That plan isn’t expected to leave anything for shareholders in the firm, including Charney. “Equity doesn’t get anything unless every single [secured and] unsecured creditor gets paid in full; it’s kind of like a waterfall with equity holders at the bottom,” Yang said.
Once the interim orders are finalized, the creditors essentially have to formally present and approve their own reorganization plan.
About 136 of the 230 American Apparel doors are in the U.S. and the company will pick through those stores during the bankruptcy and decide which to keep.
“They’ve done a pretty good job with picking some pretty good locations and in some cases very good locations around the country,” said Andrew Graiser, co-president of real estate advisory firm A&G Realty Partners, pointing to the company’s outposts in Miami and New York.
The stores that are shuttered will hold liquidation sales and their leases will be auctioned off or returned to the landlords.
Graiser said the stores will be picked based on how much money they make, how much it costs to ship to, what the trends are at the moment and so on.
“You have one chance to do this right,” he said. “The one thing about bankruptcy is it allows you to do things you can’t do outside of Chapter 11.”
All in all, American Apparel is seen as surviving the bankruptcy.
“This case has a very good chance of succeeding,” said Deborah Piazza, a bankruptcy attorney and partner at Tarter Krinsky & Drogin. “It’s a company that I believe can be reorganized. It depends on the core business. They have financial companies backing them, which in today’s market is half the battle, if you have financial companies believing that you have a business model that can succeed. The brand is a large part of it.”
Douglas Hand, an attorney at Hand Baldachin & Amburgey, which works with fashion companies, noted, “The appeal of the brand is maybe one that’s tarnished, but I think they’re trying to pivot on their Made in America roots and maintain them. That and emerging from bankruptcy could make them shiny and charming post-Dov Charney.”
Even so, Hand added, “Bankruptcy can accomplish a lot of things, but I don’t know if it can make the name female-friendly.”
Beyond the company’s racy advertising with its amateur porn vibe, the extremely libertine Chaney and the company were repeatedly sued for sexual harassment while he was in charge. Charney has denied misconduct and said that his lifestyle and position of prominence made him a target. In the bankruptcy filings, the company detailed how much it paid for claims of alleged misconduct against Charney.
The claims came from New York, Los Angeles and Miami and range from a $150,000 payment in 2011 to Ariel Flores in a claim without formal suit to a $2 million suit (Wilson v. American Apparel Inc. and Dov Charney) settled in February in Los Angeles Superior Court.
Several claims were settled in confidential agreements with no dollar figure given in the papers.
A source close to Charney noted that some of the settlements were made after he left the company and covered cases that he was prepared to litigate to prove his innocence.
Keith Fink, Charney’s attorney, added in a statement: “Mr. Charney has never been found by a judge, jury or arbitrator to have committed sexual harassment. Never. In many instances, cases were dismissed or defeated. In other instances, cases were settled because the insurance company whose only goal is to save total dollars wanted to stop the legal bleeding on these cases. The insurance carrier not only had to pay attorneys fees to several defense firms but faced the prospect of having to pay significant attorney’s fees to plaintiffs counsel even with a small award.”
This legacy is part of the issue that Charney must contend with as he seeks to find a partner to retake control of the company. However, Charney’s long been known as a colorful figure, to say the least, and has succeeded in finding deep-pocketed investors willing to back him, although with debt that came at higher interest rates.
There is also the possibility that someone else will come forth to try to buy American Apparel from the creditors. When the company hired Moelis & Co. in December to explore some sort of transaction, including a possible sale, the investment bank reached out to 92 parties and found 18 serious enough to sign a non-disclosure agreement in order to look at the company’s books.
The company would seem to be only more attractive after the bankruptcy, since its debts would shrink from about $300 million to no more than $135 million and the store base will have been cleaned up.
Hope springs eternal in Camp Dov, with one person close to him saying that the founder who built the brand and drove it into the mainstream consciousness is the only person who’s proven they can build the business, colorful lifestyle or no. “The highest bidder is going to be an investor working with Dov and in order to get him incentivized, they’re going to have to give him significant equity,” this person contended.
Others say that Charney has had his chance.
But with American Apparel, history has shown time and again that anything is possible.