CEO Misconduct and Mounting Debt May Lead American Apparel to File for Bankruptcy

CEO Misconduct and Mounting Debt May Lead American Apparel to File for Bankruptcy

by Mary Wenzel, J.D. , September 2014

American Apparel is known for its racy, realistic ads and its bright colored, revealing clothing. The once-thriving retailer, which made $300 million worldwide in 2006 and expanded to 11 countries in three years, is now sinking fast. Faced with a lack of leadership, financial difficulties and bad press, the brand may be forced to file for bankruptcy.

Led by former CEO and founder, Dov Charney, the company’s American-produced clothing, irreverent attitude and beautiful models made their products popular among young people everywhere. But over the past few years, the company lost its appeal.

Charney Gets his Company into Trouble

Allegations of Charney’s sexual misconduct came to light, and, coupled with declining sales, the company fired him in June. The former CEO allegedly made inappropriate comments to female employees, held one as a sex slave and walked around the production room in his underwear on at least one occasion. One employee was even rewarded $700,000 by the company due to “defamation for failing to stop the publication of naked photographs of a former employee,” according to Slate.

Along with the lawsuit brought on by a former employee, according to Bloomberg, its shareholders sued American Apparel and the former CEO in early July for “Charney’s misconduct that violated the company’s sexual harassment and discrimination policies.”

The Fall of an Empire: American Apparel’s Financial Struggles

In addition to Charney’s antics, American Apparel has struggled since 2010, amassing $270 million in net losses in less than 4 years. The stock has sunk to $1.14 a share. By comparison, in 2007, at its peak, it was trading at $15 a share.

The retailer was once the focal point of hipster culture, producing revolutionary ads that stirred up controversy and unique clothing that led to hundreds of millions of dollars worth of sales. Analysts point to the fact that American Apparel hasn’t followed the current trends and isn’t able to keep up with other brands like Uniqlo and Forever 21. Customers got tired of the same look and went elsewhere.

Dealing with the Debt

Though Charney has been rehired as a creative consultant, he no longer has access to his email and can’t make any decisions as ex-chairman of the board. Since his firing, Standard General, an investor, has swooped in to try to save the retailer from declaring bankruptcy.

They are close to paying off Lion Capital LLP, who are demanding repayment of their $10 million loan. If they decide not to help the brand, it will go into default. That default might spark a chain effect, affecting the $210 million in bonds and $50 million credit line they took out from Capital One Financial Corp.

How Bankruptcy Could Help the Brand

In situations like the one American Apparel is currently facing, Chapter 11 bankruptcy may be a solid option. It would provide court oversight and the ability to restructure and repay all of their debts. They could continue to function, essentially.  

Analysts are currently expecting some major improvement in American Apparel’s earnings in 2014. If things continue to decline, at least Chapter 11 would allow them to turn a new leaf and forge a future with a new leader and less debt.

Using Chapter 11 Bankruptcy in Your Business

If your company is faced with an incredible amount of debt, Chapter 11 bankruptcy may be just the opportunity you need to create a new beginning for your business.

You should explore your options with a bankruptcy attorney. If you want to continue operating, you may find that you can restructure your debt, keep serving your customers and come out on the other side stronger.