LOS ANGELES — American Apparel’s already strained finances will be further pressured by a court order compelling it to pay $2 million owed to restructuring firm FTI Consulting Inc.
Although the company just came out of Chapter 11 protection in February, the situation is again looking dire, with the specter of bankruptcy once again looming. Sources close to the firm confirmed the possibility of a second bankruptcy, which would be in conjunction with a sale. However, the order to pay up could accelerate such a filing if a deal with a buyer can’t be reached.
FTI and the litigation trustee on behalf of the unsecured creditors committee asked a Delaware bankruptcy court judge in separate motions last week to force American Apparel to make good on the money owed to FTI, which was first retained by the company to investigate the ouster of founder Dov Charney — the beginning of a battle that was disastrous and expensive for all parties.
The judge overseeing the case on Nov. 10 signed off on the motion to the unsecured creditors, which would require the company to make a payment of $1.25 million within 30 days. That followed paperwork filed earlier this week in court approving the payment of $2.03 million in unpaid bills to FTI within seven days. Payment on the latter would be due next week and, according to the discussion in court, could strain American Apparel’s finances to the breaking point.
References to “liquidity constraints,” were made by the company’s lawyer Scott Greenberg of the firm Jones Day, who told the court other professional servicers have also not been paid, including more than $800,000 in legal fees written off by his own firm.
“I think the company is just facing certain liquidity constraints and is kind of doing the best they can, quite frankly, your honor,” Greenberg told the court, according to transcripts of the hearing.
FTI’s motion originally requested payment be submitted within one day of the judge’s order, which Greenberg argued in court “would put the company in a very tough position to state it mildly,” arguing that more time for the struggling company to pay the bill is necessary so as “to not facilitate or precipitate a situation that would make it that much harder, quite frankly, to pay creditors of the reorganized debtor’s estates as we move forward.”
An attorney for the company’s bondholders also came to the company’s defense mainly to say payment within one day “just further exacerbates the problem; it doesn’t fix the problem.”
The potential salve is a sale with talks to sell the company to Authentic Brands Group reportedly stalled earlier in the week and new reports emerging that Sequential or B. Riley have renewed interest in the firm.
American Apparel’s business has struggled to gain firmer footing since its emergence from bankruptcy and is believed to be operating at a loss. However, outgoing chief executive officer Paula Schneider indicated in her outgoing letter to the board the business was starting to see some improvement. Sources close to the company said the business has adequate funding that was enough to put out a new spring line.
A lot’s at stake with some 5,800 manufacturing and retail jobs on the line should the company be forced to cease operations — something it warned employees of in a letter sent out Nov. 7 in relation to a possible sale.
American Apparel’s international businesses have also taken blows, with stop shipments on inventory to its U.K. and Australian units forcing both to go into administration this week. A spokeswoman for McGrathNicol, the firm appointed voluntary administrators for American Apparel Australia Pty. Ltd., said stock of the three stores in Sydney, Melbourne and Adelaide would be cleared over the next few weeks and then the doors shuttered.