AMERICAN APPAREL'S ROAD TO BANKRUPTCY LITTERED WITH LAWSUITS

Original Story: forbes.com

As the prospects of bankruptcy for American Apparel have shifted from “if” to “when,” the company is faced with mounting legal baggage. A bankruptcy filing would automatically pause all lawsuits against the company, but its docket has grown in recent months with complaints from vendors, employees, shareholders and its infamous former CEO, Dov Charney – himself the target of a series of sexual harassment suits. A Toledo bankruptcy lawyer is reviewing the details of this case.

Last week, the New York Stock Exchange notified the company that it is at risk of being delisted from the exchange. The company has until November 15 to come into compliance with listing standards, but will likely be in bankruptcy court before then. American Apparel is ironing out the preliminary details of a restructuring plan that would see it skip a $14 million coupon payment due October 15 and use the 30-day grace period to drum up revenues during its pivotal Halloween shopping period before filing for Chapter 11, sources have told Debtwire.

Outside the small world of lawyers and bankers who have long eyed a restructuring for the company, American Apparel is as well known for Charney’s antics as it is for its clothing. A 2004 Jane magazine profile described Charney repeatedly masturbating in front of its reporter during interviews, and other stories followed that Charney referred to women as “sluts” and demanded that his store managers fire “ugly” employees. Lawsuits followed, alleging sexual harassment against many of the company’s female employees. A Boston M&A lawyer represents business clients in company restructuring and acquisitions.

American Apparel’s board of directors ousted Charney as chairman in June 2014, with cause – accusing him of refusing to take sexual harassment training and using company funds as hush money for former employees. The board highlighted the mounting legal expenses the company faced while defending lawsuits aimed at Charney, and said that potential financing sources would not deal with the company while Charney was involved.

Following his dismissal, Charney pursued a hostile takeover of American Apparel, reaching a deal with hedge fund Standard General to increase its hold on the company’s stock to 43% and potentially prop up Charney to retake control of the company.  This May, a group led by Eliana Gil Rodriguez, a former American Apparel employee and friend of Charney’s, sued the company in Delaware claiming that the board had concealed a plot to fire Charney after its reelection in June 2014 by issuing false and misleading statements.

But the alliance of Charney and Standard General was short-lived, as Charney filed a suit in June accusing Standard General and American Apparel of conspiring to remove him from the company. The hedge fund filed a lawsuit in July claiming that Charney had not met the financial conditions of the deal.

In September, American Apparel shareholders sued Standard General and board member Joseph Magnacca, the former CEO of RadioShack, claiming that the hedge fund is using the same vulture tactics on American Apparel that it used when it bought RadioShack debt to keep the company out of Chapter 11 before acquiring half its stores in bankruptcy. American Apparel’s shareholders claim that Magnacca and Standard General are too entangled, with Magnacca allegedly texting Standard General’s leader that he would be “anyplace anytime” for the hedge fund.

Vendor The Knit House Corp also sued the company last month, seeking $53,667 it claims was never paid on a fabric merchandise agreement. In June, BSG Tech LLC sued the company for infringement of its sound technology patents. More than 200 employees filed a class action against the company in April, claiming that they were laid off without proper legal notice. A Minneapolis class action lawyer is experienced in the effective resolution of class actions lawsuits as related to damage inflicted upon groups of people.

As bankruptcy fast approaches, shareholders are going after Standard General and Magnacca, Standard General and Charney are pursuing each other following their breakup, and Charney at this point is on no one’s team while he continues to make noise. Now Charney’s declaration of good faith at the time of his joining with Standard General has an ironic echo as the family drama comes under the jurisdiction of a bankruptcy judge. A Kansas City bankruptcy lawyer is following this story closely.

“The least important thing was me,” Charney said at the time. “I know that will be dealt with fairly later.”