With that debt now mushrooming to $30 million, Charney filed for personal Chapter 11 protection on March 10 in U.S. Bankruptcy Court in Los Angeles, hoping to resolve the issue hanging over his head for nearly a decade.
Standard General, a hedge fund that bailed out Charney in 2014, has spent years trying to claw back money it helped him invest in American Apparel after he was pushed out following a series of scandals, including employing immigrants without U.S. work permits and sexual harassment lawsuits.
The legal kerfuffle with Standard General went to the Delaware Court of Chancery in 2017 where a judge ordered Charney to repay the millions he owed the hedge fund. Charney appealed and lost. Since then, the debt has been looming over him.
“His only choice was to file bankruptcy,” said William N. Lobel, Charney’s attorney. “Hopefully, the debt will be gone, and he can get on with his life.”
Charney’s bankruptcy filing also includes his startup venture Arya’s Vintage Closet, a vintage clothing store he hopes to protect and eventually open in Costa Mesa, Calif. The new business was registered in February with the California secretary of state.
Charney’s attorney said the bankruptcy filing will not affect the operations of Los Angeles Apparel, the clothing factory in south-central Los Angeles that Charney founded in 2016. It operates with 1,500 workers making everything from T-shirts and tennis skirts to jeans and body suits. “[Standard General is] claiming that they can tap Los Angeles Apparel, but there are no grounds for it,” Lobel said.
Charney, who said in a phone conversation that he did not want to comment about the bankruptcy filing, founded Los Angeles Apparel after he was pushed out of American Apparel.
While Charney runs Los Angeles Apparel, which pivoted to making pandemic PPE, he does not own the company. His attorney said some 30 entities invested in the clothing factory, including a Montreal trust linked to Charney’s father, Morris Charney.
The bankruptcy filing listed Charney’s liabilities as between $10 million to $50 million. Standard General and Standard General Master Fund are trying to recuperate their $20 million used by Charney to buy more shares in American Apparel that would have raised his ownership of the company from 27 percent to 43 percent. He was trying to return to the T-shirt company’s board and regain his position as chief executive.
At the time, Standard General was expected to reap a profit from its loan if the stock price rose. If the stock price went down, Charney was on the hook to repay the $20 million.
Charney was doing everything he could to return to the company that went public through a reverse merger in late 2006. He felt ambushed when the American Apparel board ousted him in 2014 as chairman and suspended him as the CEO, alleging misconduct and that he had repeatedly been accused of sexual harassment.
In the end, the stock was worth nothing because American Apparel filed for bankruptcy twice—the second time in November 2016. Months later, the clothing factory laid off 2,400 employees from one of the largest apparel factories in the United States. It also shuttered its retail chain that had dwindled to 110 stores.
During a bankruptcy auction in early 2017, Gildan Activewear bought American Apparel’s intellectual property rights and other assets for $88 million and took the label online.
American Apparel, founded by Charney in 1997, had a reputation as a company that didn’t always operate under the same rules as other apparel enterprises. It was located in an old building near downtown Los Angeles in an area that was faded and run down. The neighborhood is now a trendy site for clothing companies such as 7 For All Mankind, Splendid and Ella Moss with corporate offices in the area.
American Apparel’s black-and-white print ads and billboards used risqué photos and real people to advertise the company’s underwear, T-shirts and other clothing. It came under fire for being too provocative in its ad campaigns, but it also launched a “Legalize LA” ad promoting legal residency to illegal immigrants.
When Charney said he had a hard time convincing stores to stock his T-shirts, he launched his own retail outlets in 2003. By 2009, the chain had grown to 281 doors around the world.
That same year, federal inspectors discovered that 1,600 of American Apparel’s nearly 4,000 employees did not have proper papers to work in the country legally and had to be let go.
The layoffs temporarily crippled American Apparel’s revenues as company executives searched for trained garment workers in the country legally. Eventually, the venture’s revenues grew to $633 million in 2013, but net losses totaled $106 million.