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American Apparel Files For Bankruptcy

After months of financial woes and legal disputes with former CEO Dov Charney, American Apparel has finally filed for Chapter 11 protection.

American Apparel Files For Bankruptcy

As recently foreshadowed by the falling sales recorded in its second-quarter earnings report, American Apparel has filed for bankruptcy. The embattled clothing brand has faced mounting financial and legal troubles over the past year, in part due to lawsuits brought against American Apparel by ousted CEO Dov Charney.

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The company filed for Chapter 11 bankruptcy protection on Monday, in a Delaware court. In a deal that will supposedly allow its 130 U.S. stores to stay open, American Apparel’s $300 million of debt will be cut down to $135 million, through a restructuring that will see its lenders trading their debt for company stock. Those creditors will have to provide additional capital as well, in an effort to keep American Apparel afloat and have its Los Angeles manufacturing center continue operating. The filing did not disclose any layoffs.

Charney, who in December was officially booted from the company he founded, had already been fired from his longtime role as CEO last June; he was retained as a consultant afterward, until American Apparel named retail veteran Paula Schneider as its permanent CEO. Charney had long been at the epicenter of recurring sexual harassment allegations and lawsuits, but his influence on the brand and formidable stake in the company made it difficult to shake his presence. (According to the New York Times, Charney’s stake was worth more than $8 million on Friday, prior to the bankruptcy filing.) Since being fired, Charney has brought multiple suits against American Apparel over claims of defamation.

Filing for bankruptcy will stall the many lawsuits against American Apparel and allow the company to iron out its finances, Schneider told the New York Times:

“Our debt load simply wasn’t sustainable. You can’t do a turnaround plan without cash,” Ms. Schneider said. “Every day, we would make choices on what we were going to buy, even though we needed more for everyone. Every day, I have to pick between what I’m buying for retail or wholesale, or giving e-commerce enough money to develop a mobile app,” she said.

“And it was all to get to the point where we could make these massive interest payments, and nothing that was really moving the company forward,” she said. “Not having the nuisance lawsuits, not having this massive debt, these are all extremely important things for the company to thrive.”

Nearly a year after his exit from the company, Charney is still largely to blame for American Apparel’s financial woes. According to the bankruptcy filing, his rampant misconduct cost the company about $7 million while he was still there–expenses that were necessary to “resolve certain sexual harassment, sexual assault and battery, racial discrimination and other claims against Dov Charney as well as severance claims and a claim relating to a 2011 employee fatality.” Early last year, American Apparel also found evidence that Charney had misused company money for “personal use, extreme verbal and physical abuse of employees, sexual harassment, sexual assault and misconduct and other illicit and unlawful behavior”–charges that, again, cost the brand millions of dollars.

Soon after Charney was shown the door last December, American Apparel was courted by a prospective buyer, but negotiations came to a halt earlier this year, Bloomberg reported.

[via Wall Street Journal]

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About the author

Pavithra Mohan is an assistant editor for Fast Company Digital. Her writing has previously been featured in Gizmodo and Popular Science magazine.

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