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American Apparel Inc. founder Dov Charney plans to start a new clothing business after a bankruptcy judge eliminated his last best chance to retake control of the company he started in college.
U.S. Bankruptcy Judge Brendan Shannon in Wilmington, Delaware, on Monday approved a reorganization that hands the company to senior lenders, shutting out Charney's alternative proposal. The lenders, including Monarch Alternative Capital, will trade their debt for control of the retailer, reducing its liabilities by about $200 million.
Charney, who was thrown out in 2014, had assembled investors to back a $320 million takeover plan. Shannon rejected that proposal because he said Charney's group wasn't prepared for a long fight with the senior lenders.
Los Angeles-based American Apparel filed for creditor protection in October. The company, known for its made-in-U.S.A. labor practices and racy advertising, posted losses every year since 2010. Its troubles were compounded by allegations of misconduct against the founder, which he denies. Charney was unapologetic after Monday's ruling.
"I did the best that I could," he said in an interview. "They threw me out and made it worse."
Charney's financial supporters say he will return, with their help.
"We are backing Dov on a new venture," said Chad Hagan of Hagan Capital Group. "We will keep an eye out on American Apparel and see what happens with the brand. Ideally, if we can pick it up down the road, we will."
He said the new venture will be a direct competitor to American Apparel and that plans for it are concrete, but wouldn't comment further. Charney accused American Apparel management of leading the company down a "road to ruin."
"Part of me can scarcely believe that a court could confirm their plan as feasible given the operating performance of the business under their management," he said in a statement. "Stay tuned."
Since his ouster in 2014, Charney has been looking for a way back in. He teamed with Hagan and Silver Creek Capital Partners to assemble the alternative takeover offer. But Shannon wasn't swayed by it, saying he found no "meaningful alternative" to the company's preferred plan.
The judge said the Bankruptcy Code forced him to reject Charney's objection to American Apparel's plan, in part because the board was turning the company over to the senior lenders through a traditional reorganization, not an auction.
In such a situation, creditor votes matter more than efforts to find a buyer, according to the judge. If the board was simply trying to sell American Apparel's assets to the highest bidder, Shannon said, he probably would have ordered the company back to the negotiating table.
Shannon said shareholders — including Charney — would be wiped out by the plan because the company wasn't worth enough to leave anything for them. In bankruptcy, shareholders can't collect until all creditors have been paid in full.
Charney lost mainly because his backers were unwilling to financially commit themselves to a protracted fight with the senior lenders. The judge noted that Hagan testified he was close to getting a $50 million, asset-backed loan but didn't have a binding commitment. American Apparel has a guaranteed $40 million loan it can use when it exits bankruptcy.
"This is a new day for the company, and a positive outcome for our customers, vendors and employees," American Apparel CEO Paula Schneider said in a statement. "With this milestone behind us, we are now fully focused on executing our turnaround strategy."