American Apparel Gets Deadline Extension on Reorganization Plan as IRS Files Objections

Manufacturing

As of Thursday, December 31, 2015

American Apparel has been on a fast track to reorganize after it filed for Chapter 11 bankruptcy protection on Oct. 5.

It is hoping to be out of bankruptcy by early February but on Dec. 28 filed a request to extend from Feb. 2 to May 2 its exclusive right to file a bankruptcy plan. The request was granted by U.S. Bankruptcy Judge Brendan L. Shannon.

American Apparel also was granted an extension from Feb. 2 to May 2 to reject store leases for its 125 stores in the United States.

American Apparel has already filed a joint plan of reorganization, noting it will close 17 stores.

With the deadline extension, the company is hoping to avoid other acquisition plans being filed, particularly any proposals being undertaken by American Apparel founder Dov Charney, who was suspended as the Los Angeles clothing company’s chief executive and president in June 2014 for alleged misconduct and fired one year ago. He was replaced by Paula Schneider at the beginning of 2015.

“To allow exclusivity to lapse and for parties to potentially file multiple competing plans at this stage of the case would increase the costs to the debtors’ estate, unduly burden the court and quite likely impede—rather than facilitate— meaningful progress toward the debtors’ exit from bankruptcy,” the company wrote in documents filed with the U.S. Bankruptcy Court in Delaware.

A hearing on the confirmation plan is scheduled to be heard in Bankruptcy Court on Jan. 20. American Apparel is hoping to emerge from bankruptcy soon after Jan. 20 and before Feb. 2. It will go from a publicly traded company whose stock was sold on the New York Stock Exchange to a privately held entity.

However, on Dec. 31, the Internal Revenue Service, an unsecured creditor, filed an objection to American Apparel's reorganization plan. The IRS said American Apparel owed $33,747 in back taxes while American Apparel Retail owes $5,200 in back taxes. The IRS also noted that American Apparel had not filed withholding tax returns for 2012, 2013 and 2014 for foreign persons receiving U.S. income. The IRS "objects to the confirmation of the plan unless and until all outstanding federal tax returns have been filed," it said in court papers.

Under the bankruptcy reorganization plan, the company struck a deal with its secured lenders to reduce American Apparel’s debt through a process called debt-for-equity conversion, which means the company’s bondholders swap their debt for shares in the company.

These secured lenders will convert $200 million in bonds into equity in the reorganized company. They have already provided $90 million in debtor-in-possession financing as well as $70 million in new liquidity.