Dov Charney

American Apparel chief executive officer Paula Schneider detailed in court the chaotic situation she walked into when she took the reins of the Los Angeles firm roughly a year ago.

Schneider was the first to testify at a hearing that began this morning in Delaware bankruptcy court in which a judge will decide whether or not to confirm the company’s reorganization plan as attorneys for American Apparel founder Dov Charney argue against it.

Charney is part of a group of investors that include Hagan Capital Group and Silver Creek Capital Partners that have put in two failed bids now — the most recent of which was for roughly $300 million — for American Apparel, but accuse the company of leading an unfair marketing process and have been less than helpful during negotiations beginning with a data room Charney’s attorney likened in his opening remarks to a “litigation dump.”

Charney, along with Hagan Capital Group managing partner and group president Chad Hagan, are also set to testify at the hearing, which is expected to continue into Thursday.

The decision will come down to more than “whose got the most money in the wheelbarrow,” as judge Brendan Shannon put it in court just before Schneider took the stand.

Much of her testimony described the apparel behemoth’s back-end operations as running more akin to a scrappy start-up than the multimillion-dollar, publicly traded company it had become. The details she shared are much of what she’s publicly said in multiple interviews throughout last year: no spring line when she joined in January 2015 following Charney’s firing; more than 70 people directly reporting to her; a looming bond payment due; four million units of slow-moving inventory, and the company was in the middle of a clearance process called the dot sale that ultimately did more harm than good.

“They thought it would improve comps, but what it did was pretty much break the system,” Schneider testified of the dot sale. “It basically looked like you were going out of business.”

The company was in “pretty dire straights,” she went on to say.

Robert Flachs, managing director at American Apparel financial adviser Moelis and Co., later took the stand to defend the company and his firm’s process for conducting a sale and how they handled the analysis of the Hagan-Silver Creek offer. The bid was ultimately rejected for a number of reasons Flachs detailed. He pointed out the proposal would have required consensus among the bondholders, resulting in a protracted bankruptcy the company can’t afford and potential litigation. Additionally, he said, it would leave American Apparel with slightly less liquidity than the reorganization plan before the judge and with about $10 million more of net debt upon emergence from bankruptcy. “We’re just trying to get away from that,” Schneider said in her testimony of the idea of additional leverage.

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