The battle for bankrupt Hartmarx Corp. entered a new stage Friday as Wells Fargo charged Emerisque lacked the financing to buy the American apparel firm or a commitment to U.S. jobs if a deal can be struck — contentions the London-based private equity company firmly denied.

This story first appeared in the June 1, 2009 issue of WWD. Subscribe Today.

Wells Fargo, the lead agent for the group of banks providing financing to Hartmarx, said the group opposes the offer because Emerisque “fails to provide adequate value to Hartmarx’s lenders.” It said Hartmarx, in bankruptcy since January, owes the banks more than $114 million.

Wells Fargo also reasoned the offer from Emerisque doesn’t ensure jobs at Hartmarx’s factories since several are to be sold within three months of the acquisition.

The bank added that Emerisque is unwilling to assume Hartmarx’s obligations to its employees, including health care and retirement benefits, and “does not even commit to rehire a specific number of Hartmarx employees.”

There is no guarantee that jobs will stay Stateside in a liquidation like the one the bank is said to be pushing. A buyer who purchases the men’s brands could in turn designate a licensee for products that would involve overseas production.

Emerisque shot back sharply on Friday, saying, “The only factual component of the Wells Fargo statement today is that they believe they should realize a higher cash return on their claim. There is a significant gap between their expectations and the reality of where asset valuations are in the current market.”

The British firm added, “We will either assume the current collective bargaining agreement, or work with the unions to execute a new agreement on mutually acceptable terms. Any statement implying that we seek to de-unionize the company is patently false and a clear attempt to deflect union’s criticism and political pressure directed towards Wells Fargo.”

Lawmakers, union officials and Hartmarx employees have been turning up the pressure on the bank, a recipient of $25 billion in Troubled Assets Relief Program funds from the federal government, to continue to finance the company, avoid a liquidation and allow a sale to go through.

Wells also said the cash portion of Emerisque’s offer of $70.5 million is subject to adjustment and likely to be reduced to less than $56 million. A source close to Emerisque explained the cash adjustment would come into play if assets are sold and the proceeds were used to pay down debt.

Emerisque on May 21 was named the stalking horse bidder in a deal valued at $119 million, including the assumption of liabilities. In addition to the cash component, there is a $15 million note that matures in five years. A hearing is set for today in a Chicago bankruptcy court for approval of the stalking horse bid. The unsecured creditors committee also filed a limited objection on Friday, seeking to lower the break-up fee and expense cap as well as extend the time frame for potential bidders to jump into the auction process.

Could the stalking horse bid, which sets a baseline for other offers, collapse before it even gets approved?

“A secured creditor has a lot of say when it is a bank with liens against assets that are being sold, particularly if they are being sold for less than what the bank thinks it can get in a liquidation,” said Lawrence Gottlieb, head of the bankruptcy and restructuring practice at the Cooley Godward Kronish law firm. “The court may overrule the secured creditor’s objection based on factors in addition to what the asset may bring in liquidation, such as the effect of the offer on the ability of the debtor to stay in business, the fate of employees and how vendors will fare.

“The best bid is not necessarily the bid that brings in the most dollars,” he concluded.

Wells Fargo said Friday that Emerisque’s offer lacked financing and capital commitments to fund the purchase, but sources within Emerisque rebutted that.

Cofounded in 2004 by Ajay Khaitan, who is chief executive officer, Emerisque doesn’t manage a blind pool of money, and instead raises funding for its deals on a transaction-by-transaction basis from institutional investors and the private investment funds of families connected with Emerisque’s officers, according to one individual. This person emphasized the “equity commitment is fully funded for the Hartmarx transaction.”

An individual with knowledge of how the note was structured said the company doesn’t need to sell the factories. He explained that security was needed to back the $15 million note that is part of the transaction, and added the assets listed were the only ones owned by Hartmarx neither encumbered by a mortgage nor part of the security package for a new banking group that will provide financing to the reorganized Hartmarx.

One source close to Emerisque said the plan is to spend about 18 months repositioning Hartmarx in its core U.S. market, after which the investment firm would look at the possibility of expanding distribution of its brands overseas, such as in China, Russia, India, the Middle East and Africa. Even then, the source continued, production would remain primarily in the U.S. since those countries where the men’s brands, Hart Schaffner Marx and Hickey Freeman, would be introduced place a premium value on tailored apparel that has the “Made in America” tag line.