American Apparel defeats founder Charney in bankruptcy plan fight

WILMINGTON, Del (Reuters) - A U.S. judge on Monday said he would approve American Apparel Inc's APPCQ.PK plan to exit bankruptcy and rejected a takeover attempt from the teen retailer's founder and ousted chief executive, Dov Charney.

The American Apparel factory headquarters is pictured in Los Angeles, California July 7, 2014. REUTERS/Jonathan Alcorn

The ruling by U.S. Bankruptcy Judge Brendan Shannon clears the way for hedge funds including Monarch Alternative Capital to control the operator of more than 200 stores when it exits Chapter 11.

Los Angeles-based American Apparel Inc, known for its “Made in the U.S.A.” fashion and sexually charged advertising, filed for bankruptcy in October, blaming changing tastes and too much debt. The reorganization plan that Shannon approved would cut more than $200 million of debt and provide a cash boost.

Under that plan, the company expects to be profitable in 2018, which would be the first time since 2009.

Charney attacked the plan by pointing to tanking sales since he was fired in December 2014 and argued it needed his innovation and creativity to thrive.

In December, Charney, Hagan Capital Group and Silver Creek Capital Partners presented a $300 million takeover, which was rejected by the company’s board earlier this month.

Shannon said he had no doubt Charney and Chad Hagan of Hagan Capital genuinely wanted a chance to bid for American Apparel. However, the judge said the company is not obligated to put itself up for sale when it has a bankruptcy exit plan that has been approved by all classes of creditors.

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Charney told Reuters he was disappointed in the legal decision, but did not expect to appeal because he could not afford to post the bond that likely would be required.

Charney, a major stockholder, called the outcome a “sad indictment” of the process because it allowed the board to use the company’s resources to “achieve their goal of extinguishing the company’s shareholders.”

Shannon’s decision followed a two-day trial last week. It featured animated testimony from Charney, who seemed to relish his story of founding the company as a Montreal teenager and expanding it into a publicly traded corporation. He still seemed incredulous over what he called the “blackmail” that led to his departure.

In the end, Charney’s testimony may have been too much of what the judge called “free associating.” American Apparel’s lawyers did not even bother to cross-examine him.

Charney was fired in 2014 for allegedly misusing company funds and failing to stop a subordinate from defaming former employees. He has denied the allegations.

Reporting by Tom Hals; Editing by Chizu Nomiyama and Paul Simao