Bankruptcy Judge OKs Life-Saving Plan for American Apparel

On Monday, a Delaware bankruptcy judge ok-ed life-saving plan for American Apparel at the request of the company’s senior lenders. The judge, however, dismissed founder and former CEO Dov Charney’s bid to take over the company and revive the business.

Last fall, the chain filed for bankruptcy protection saying that weak sales, an out-of-touch sense of fashion, and scandals over former CEO’s sexual misconduct dashed all chances for it to thrive.

According to the recently-approved restructuring plan, several hedge funds would take control over the company in exchange of the debt American Apparel owes it to them. Additionally, the hedge funds agreed to invest more money into the firm to keep it going.

Charney, who was ousted from the company two years ago, has been making efforts to take over the business with help from a group of competing investors. He harshly criticized the current management board for its poor decisions that led to the company’s bankruptcy.

Nevertheless, the bankruptcy judge rejected his acquisition bid and considered a restructuring plan voted by creditors to be safer. Under the plan, the company’s senior lenders will gain ownership of the business in exchange of $230 million the company owes them.

Additionally, they are to inject $40 million into the company to help it dodge bankruptcy and an extra $40 million for investment purposes. In an 1,500-word letter, the former CEO criticized the decision, accusing lenders of running a “scorched-earth campaign” to prevent him from getting back. He also said that the company was faring better when he was ousted.

He believes that the new organizing plan is a ‘path to ruin,’ and he expressed his concerns over the current management’s abilities to bring the business back to health. He added that in the end, he and other shareholders would walk away empty handed. He also described the hedge funds that are about to take over the company as ‘predatory.’

Analysts believe that American Apparel’s struggles stem from a failing business model which made it uncompetitive against other retailers such as H&M. While American Apparel sells clothing made in the U.S., rivals lure in consumers with cheaper, China-made, but more fashionable clothing.

American Apparel currently has 8,700 employees and 218 stores of which 13 are slated to close down. The company was pondering on filing for bankruptcy since 2011, when sales were already struggling.

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