Standard General Sues American Apparel Lenders
As American Apparel is shuttering its downtown Los Angeles clothing factory and laying off thousands of workers, hedge-fund investor Standard General is suing the various lenders that bailed the garment company out of bankruptcy for the first time last year.
Defendants named in the case, filed Jan. 23 in U.S. Bankruptcy Court in Delaware, include Monarch Master Funding, Coliseum Capital Partners, Blackwell Partners and Goldman Sachs.
Standard General, which used to be an American Apparel shareholder and is a member of the lender committee that holds 90 percent equity in the company, maintained the lenders, without informing Standard General, loaded up the company with $82 million in additional debt between April and October 2016 while it sought a buyer, the lawsuit maintained.
“The loans were entered into on a piecemeal, ad-hoc basis, (sometimes only one week apart), at a time when the company was rapidly losing funds … and unable to pay its debts as they came due,” the lawsuit said.
The terms of the loans allowed the lenders to jump ahead of Standard General in American Apparel’s capital structure, the lawsuit claims.
Standard General said that under the turnaround plan, American Apparel was supposed to get out of the knitting and dyeing business in Los Angeles, move its downtown Los Angeles clothing production to the southeastern section of the United States, and fix its global supply chain in an attempt to continue operating.
“The lender committee and its representative assured Standard General that they were committed to pursuing a complete operational turnaround for the company and investing further in the business,” court documents said.
But Standard General maintains that the lenders really wanted to quickly exit the first bankruptcy, filed in October 2015, so the company could be sold and the lenders could make a “quick profit at a premium price,” the lawsuit said. But that didn’t happen when a buyer dropped out.
As the lenders looked for another buyer, the company’s factory was losing a boatload of money every week, the lawsuit said. “The lender committee did not pursue any operational or transactional solution to the company’s financial woes other than to attempt to find a new purchaser for the company,” Standard General said in its legal filing.
During this time, several high-level executives resigned from the company. In her September 2016 resignation letter, Chief Executive Paula Schneider said the sales process might not enable the brand to remain true to its ideals. Chief Financial Officer Hassan Natha also resigned.
According to the lawsuit, American Apparel and its financial adviser, Houlihan Lokey Capital Inc., resisted Standard General’s proposals to purchase the company’s retail sector weeks before the second Chapter 11 bankruptcy was filed on Nov. 14, 2016.
After an auction, a bankruptcy court judge in January approved Gildan Activewear’s $88 million purchase of American Apparel’s intellectual-property rights, wholesale merchandise and some manufacturing equipment.
On Jan. 16, American Apparel started laying off 2,500 workers as another 1,000 workers waited for their eventual firing after the company’s factory is closed. Remaining employees have been told their last day of work will be between Feb. 6 and Feb. 20.