American Apparel

American Apparel’s situation has gotten downright messy.

The group that’s yet to be paid what it was granted in the retailer’s first bankruptcy is crying foul now asking a judge to throw out the latest Chapter 11 case, in a request that could upset attempts to sell off all or parts of the business.

American Apparel emerged from its first bankruptcy in February, erasing about $230 million in debt and what then-chief executive officer Paula Schneider called “a new day at American Apparel” with the promise of a full focus on righting the business. The losses continued and the company ended up back in Delaware Bankruptcy Court nine months later.

As part of that first restructuring, the group of unsecured creditors, whose claims totaled some $105 million, agreed to instead take $2.5 million in cash. A judge ordered the first payment on that, totaling $1.25 million, be made in August and again ordered the company to make the payment when it was still found to be outstanding at an October hearing as concerns about American Apparel’s liquidity became apparent.

The litigation trustee representing the group of unsecured creditors called the company out in court documents saying the latest Chapter 11 filing was done “in bad faith” to avoid making good on its payment, among other things. The trustee argued the business issues American Apparel said were reasons for its latest bankruptcy mirror those it had before the first filing. Thus, the trustee said, it’s questionable whether “the [company’s] terminal optimism regarding the [ability to achieve] positive restructuring outcomes should be given any credence.”

The trustee added on the prospects for the business via this second bankruptcy: “There is not a reasonable likelihood of rehabilitation.”

This latest bankruptcy is seen as key in any move for the company to sell off what pieces of the struggling business it can in an auction that has Canadian T-shirt firm Gildan Activewear Inc. — with a $66 million bid — the stalking horse. The offer is a far cry from the last publicly confirmed bid of roughly $300 million from a group aligned with founder and former ceo Dov Charney revealed in January.

Elsewhere in the company’s current bankruptcy is another brewing battle involving the unsecured creditors’ pushback on terms of American Apparel’s $30 million debtor-in-possession financing. A judge said $10 million of that could be tapped in an interim order, with a final decision still to come. That group says terms for that facility should be reworked so as not to protect the secured lender group from what it said in court is a possible “day of reckoning” for the lenders. It also affirmed it intended to look into the conduct of the lender group as it related to the company’s first bankruptcy.

The majority of those bondholders in that first bankruptcy consisted of a group comprised of Standard General, Goldman Sachs Asset Management, Monarch Alternative Capital, Coliseum Capital and Pentwater Capital Management.

Standard General sought to distance itself from the turnaround failure Thursday when its attorneys said in a filing it didn’t have a seat on the lender committee board that pulled the strings on the company’s business strategy. And in an indication of perhaps some internal strife at American Apparel in the lead up to its current situation, the hedge fund said it “for quite some time has been at odds with the lender committee regarding the company’s business strategy, particularly its failure to control costs and its continued incurrence of debt during the spiral into this second bankruptcy.”

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