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It appears that American Apparel Inc.’s Chapter 11 bankruptcy proceedings might be delayed by their ousted ex-CEO Dov Charney.

Hiccup for American Apparel Bankruptcy

Last week American Apparel 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.

Charney was fired from the company last year after alleged inappropriate behavior and misuse of company funds. He denies the allegations.

Now it seems that Charney could potentially throw a cog in the wheel of the company’s Chapter 11 filing, according to Standard General. Standard General is a New York hedge fund that could potentially become a new owner of the L.A. based company should the restructuring take place. 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.

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.

Charney Interfering

Last Friday, a lawyer representing Standard General said Charney’s current contact with employees and potential investors could “interfere with the company’s effort to reorganize and come out of bankruptcy successfully.”

Standard General also indicated it will continue pursuing a case that alleges Charney has gone too far in attempts to win back American Apparel. In June, Charney was ordered by a judge to mute his criticism of the clothing retailer, at least temporarily.

According to Standard General’s lawyer, the trial against Charney for his actions to win back the company should take place by spring of 2016 now as a result of the company’s pending restructuring plan.

Charney denies the allegations that he has pushed too hard to regain the company, and has already fired back with a lawsuit against Standard General that accuses the hedge fund of misleading him and pushing him out of the company he founded in 1998.

Restructuring Plans in Chapter 11

During Chapter 11 bankruptcy, a company puts together a restructuring plan that outlines 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

If American Apparel’s restructuring plan is approved, the deal is set to wipe out the value of shares held by not only Charney, but all of the other major American Apparel investors.

“Any CEO who has built a company from scratch — which has become a sizable globally known enterprise that is nearly synonymous with the CEO himself and his personality — is going to be able to cause some sort of disruption in the bankruptcy court,” says Matt Covington, a managing director at Conway MacKenzie, a financial consulting firm specializing in handling bankruptcy transactions. “Whether he is successful or not is an entirely different story.”

In an attempt to return to his position in power at the company, last year Charney tethered his shares to Standard General, which loaned him money in order to boost his stake in the company to 43 percent.

Charney is able to halt the proceedings because, as a shareholder he could object to the plan and argue that stockholders are owed money, which is in contradiction to the plan that has set forth which gives the shareholders nothing. Charney, as 43% of the company, could also vote “no” on the proposed plan after the plan has been set forth to concerned parties to vote on.

But according to experts, shareholders have less of a standing than secured and unsecured lenders. This is because stocks are really just gambles that may or may not technically “pay off.” So even if shareholders are not on board with the plan, a judge is still able to approve it.

Additionally, Charney could raise objections along the way, including when the disclosure statement laying out detailed information for how creditors and others are treated under the proposed plan, is filed.

“He certainly can file an objection saying, ‘Judge, you shouldn’t let this go forward because of ABC reason,'” said Jasmin Yang, bankruptcy attorney at Snell & Wilmer. “He has his right to due process.”

While unlikely, Charney also may get a chance to file his own competing bankruptcy plan following the exclusive 120 days that American Apparel has for submitting and getting approval. This period of exclusivity can also be extended should a court rules so.

“It’s hard to foresee that Dov Charney or some coalition of Dov and other investors will be able to propose a competing plan of reorganization that could get approved by the court,” Covington said.

Still, unlikely situations have happened before, according to Yang. She raised the example of Meruelo Maddux Properties, a commercial real estate company whose minority shareholders were successfully able to propose a competing plan of reorganization.

“Nobody ever thought it would be a competing plan situation,” she said. “It is possible, although it’s not likely to happen.”

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 RHM LAW LLP walk you through the process so you can achieve the best outcome possible.

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