American Apparel Files for Bankruptcy

Clothing line American Apparel has filed for Chapter 11 bankruptcy protection. The country’s “Made in the U.S.A.” brand has been hit with debt, excess inventory, and millions of legal liabilities as the result of its founder Dov Charney.

American Apparel Files for Bankruptcy

According to bankruptcy court documents, the clothing company has plans to rebuild its business as part of a restructuring plan that gives the reigns over to Standard General hedge fund. Standard General rescued Radio Shack earlier this year when the electronics chain filed for Chapter 11.

Rather than auctioning off assets the retailer, known for its sexually explicit advertising and low v-neck shirts, is seeking a more traditional approach by giving control to bondholders.

Not Auctioning Assets

Known for its sexually charged advertising and tight T-shirts, the retailer is attempting a traditional turnaround under the control of its bondholders, rather than auctioning off assets.

“American Apparel is in the early stages of an operating turnaround,” said the retailer’s attorney, Scott Greenberg of Jones Day at a hearing to approve $90 million in financing to pay bills and wages.

Chapter 11 Bankruptcy

As more and more businesses struggle, the term “Chapter 11 bankruptcy” is more common than ever.

Under Chapter 11 bankruptcy, the business or individual undergoes a reorganization in order to pay down its debt and reorganize its income and expenses while regaining its profits.  If your business is a corporation, limited liability company (LLC) or partnership, it can continue business operations during the bankruptcy process. While the business is making payments through the debt repayment plan, the business continues operating.

The Chapter 11 bankruptcy process can be a complex, and lengthy one. Here is a general outline of what is required during a typical Chapter 11 case.

Credit Counseling Course for Individual Bankruptcy

If you are filing for Chapter 11 as an individual and not for your business, you will need to complete a credit counseling course. This course must be done with an approved agency prior to filing your bankruptcy. This course is not required if you are filing to reorganize the debts of a business.

To prepare your petition you will need to complete a list of your (or your company’s) assets, debts, income, and expenses. Additionally, you will need to create a summary of your financial affairs. Review everything to check for accuracy. Then you will be able to file your petition with bankruptcy clerk’s office. This filing triggers an “automatic stay” which prohibits most creditors from being able to continue their collection efforts against you or your assets until a bankruptcy judge gives them permission to do so.

Monthly Operating Reports

During your Chapter 11 bankruptcy case, you must prepare and file monthly operating reports, documenting your income and expenses for the month, with the bankruptcy court.  These reports are made available to your creditors and the United States Trustee who then assess whether or not your plan for reorganization is feasible. Since the approval of your plan will be based on these reports, you will want to make sure you pay close attention to them. This is also a good reason to work with a bankruptcy attorney that knows the process and can ensure that everything is recorded in a correct manner.

Initial Debtor Interview and Meeting of Creditors

Typically, debtors are required to attend an initial debtor interview. During this meeting the United States Trustee meets with a debtor to review preliminary information regarding the case. The Trustee will also review a debtor’s responsibilities during the bankruptcy process.

After the initial debtor interview, the next meeting is the 341 meeting of creditors. You will need to attend this about thirty to forty-five days after the initial filing date of your case. It usually lasts one to two hours. This meeting is a public hearing that gives your creditors an opportunity to question you under oath regarding your Chapter 11 bankruptcy petition.

Disclosure Statement 

You will need to file a disclosure statement containing information about your financial affairs. This will allow your creditors to make informed decisions when they decide if they will accept or reject your plan.

What should be included on the disclosure statement is dependent on the nature, history, and size of the Chapter 11 debtor. For small business cases, a bankruptcy court may decide a separate disclosure statement is not needed because the plan of reorganization provides thorough information.

Here are some of the typical items included in a disclosure statement:

  • financial history of debtor
  • circumstances that led to the bankruptcy filing, including significant events like job loss or injury
  • summary of reorganization plan
  • description and value of debtor’s assets
  • description of claims, liabilities and how they are addressed in the plan
  • tax consequences of reorganization plan
  • plan confirmation procedures and requirements
  • feasibility of plan
  • comparison with Chapter 7 liquidation, and
  • all other information that a creditor would need to make an informed judgment about the plan.

The disclosure statement and proposed plan of reorganization is then mailed to every party in interest, including your creditors. The disclosure statement also includes information for your creditors that explains how they may participate in the bankruptcy. It also includes information regarding how the creditor’s rights may be adversely affected.

Disclosure Hearing

After the disclosure statement is filed, a court holds a hearing to approve or reject it. Typically, a plan will not be accepted or rejected until the disclosure statement is approved.

There will be a hearing for the disclosure statement during which parties involved can object to the language included in the statement. Usually disclosure statements are approved and the hearing is just a formality.

Proposed Plan for Reorganization

You will outline how creditors will be treated in your plan of reorganization. Creditors are assigned as either priority debt creditors, secured debt creditors, or unsecured debt creditors. If a creditor does not approve how they are treated in your proposed plan of reorganization, you are able to file a motion (called a cramdown) asking the judge to force the creditor to accept the plan.

Confirmation Hearing

You will ask a judge to approve your plan of reorganization at your confirmation hearing. All of your creditor classes will need to have accepted your plan for a judge to be able to approve the plan. This is where you would file a cramdown motion if you have not received approval. A court will then need to reschedule the confirmation hearing. If the creditor does not respond to this motion for cram down, it is ruled as accepting the plan. But if the creditor does respond to the motion, you will need to negotiate with the creditor to try to get it to accept plan treatment. If an agreement cannot be made between you and the creditor, then a judge will decide at a hearing.

Making Payments 

After your reorganization plan is approved, you have to start making payments to creditors in accordance with that confirmed plan. You will need to abide with the new contract you have with each of your creditors. If you default on payments, a creditor may sue you on that basis. Because of the agreed to plan, you will have little recourse.

Payments can continue for many years depending on your proposed plan. And debts such as mortgages or car notes typically get re-amortized over an extended period. This means a lender recalculates the monthly payments during the repayment term.

Discharging of Debts

A discharge of debts is the main reason you enter Chapter 11 bankruptcy, and it happens after you have made all required payments to your unsecured creditor class. After paying everything off you will ask the court for a discharge of the remainder of your unsecured debts. This motion prevents any of these creditors from collecting on any of the debts in the plan. This is the end of your Chapter 11 bankruptcy.

American Apparel’s Chapter 11

 Under American Apparel’s reorganization plan, other hedge funds in addition to Standard General hedge fund will provide $70 million of new capital over the next six months.

The liquidity created from senior bondholders is set to help the retailer hire new talent to work on building and boosting Internet sales, rebuild the brand and create a fresh look for a product line that rarely saw change from one season to the next.

“American Apparel is a unique product that can really stand out. People still want to go into stores, feel the fabric and try it on,” said Burt Flickinger, managing director of retail consultancy Strategic Resource Group.

Additionally, American Apparel has plans to keep its California manufacturing base.

Working With an Attorney

Facing bankruptcy, regardless of if it’s a personal or business bankruptcy, is a scary thing. There might be ways to avoid it and still keep your credit intact. Working with a bankruptcy lawyer will ensure you are made aware of all the options available to you. Because bankruptcy law can be confusing, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have should you decide to file. There can be a lot of questions during this extremely stressful time. Let the lawyers at Resnik Hayes Moradi LLP walk you through the process so you can achieve the best outcome possible.