A fresh lawsuit from Standard General serves up more questions as to whether American Apparel ever had a fair shot at a turnaround following its first go at bankruptcy.
New York investment firm Standard General on Monday filed a lawsuit against Goldman Sachs, Monarch Alternative Capital, Coliseum Capital Partners LP, Pentwater Capital Management and Blackwell Partners LLC — the other financial firms that comprise American Apparel’s lender committee — for breach of contract in hopes of winning damages and have a judge reassess the priority of payment claims on certain loans.
The picture painted isn’t pretty, with Standard General alleging the lender committee propped up the company with additional debt — $82 million between April and October of last year — as it focused on a sale of the business for the highest price rather than a turnaround of American Apparel.
Prior to and during the company’s second bankruptcy the lender committee “has repeatedly acted in disregard of Standard General, trampled over Standard General’s contractual rights and interests and ignored Standard General’s status as an equal lender,” the lawsuit said.
Coliseum declined comment while Monarch, Pentwater and Goldman did not immediately respond to requests for comment Tuesday.
The filing is timely as the local market reels from last week’s mass layoffs at American Apparel that involved 2,400 jobs cut at the Los Angeles firm. About another 1,000 positions are up in the air as the company focuses on a wind-down and transition to its largest buyer Gildan Activewear Inc. Other deals, struck during a bankruptcy auction this month, sold off smaller parts of the business.
The lender committee combined holds 80 percent of American Apparel’s debt, more than 90 percent of the equity and controls American Apparel’s board.
Standard General asserts the other lenders told the firm they were committed to a turnaround strategy following the company’s emergence from its first bankruptcy in February of last year, acknowledging the additional equity such steps would involve.
Those promises gave Standard General confidence to agree to invest new money, putting up $25.8 million, or 20 percent, of the total $129 million provided by the lender group in exit loans.
That turnaround strategy, which was never shared publicly up until this point, would have called for American Apparel’s exit from the knit and dye business, a focus on fixing the global supply chain and moving cutting and sewing to the Southeast.
Instead, what followed two months after the company’s emergence was the tacking on of debt via amendments to the credit agreement — nine, totaling $82 million — without consulting Standard General, the lawsuit said.
These amendments, sometimes being added a week apart from one another, came “at a time when the company was rapidly losing funds and, upon information and belief, was unable to pay its debts as they came due. The company should have been preparing for a second bankruptcy filing, instead of digging itself further into debt,” the court filing said.
A revolving credit facility of as much as $40 million written into the credit agreement as a last-ditch financial crutch was never provided, which could have given the turnaround legs under then-chief executive officer Paula Schneider.
Standard General said it attempted to discuss the company’s turnaround with the other lenders between July and November of last year, but “the members were no longer interested in a turnaround” and instead “were laser-focused on extricating themselves from the situation without liability.” The firm said it challenged why the Los Angeles factory remained open, pointing out weekly losses. Standard General alleges it was told by the lender committee the factory needed to remain open in case a buyer interested in the facility came along.
It appears there had also been two parties looking to partner on an acquisition of American Apparel that would have included purchase of the intellectual property and a retail partner that would have paid an annual royalty to license the name for retail. Standard General said it was never put in touch with those bidders.
The firm also alleged it had offered to establish a holding company so the lender committee could have went in on a credit bid — which would have allowed it to bid on the company’s assets up to the amount of the debt. That idea was met with no support, Standard General claimed in the complaint.