American Apparel and Dov Charney face off in Bankruptcy Court

American Apparel and its ousted CEO, Dov Charney, are duking it out again.

In Delaware Bankruptcy Court on Wednesday, the two sides squared off in a battle to convince the judge that their plans are in the best interests of the Los Angeles company and its creditors.

American Apparel Inc., which filed for Chapter 11 bankruptcy protection in October, supports a reorganization plan that would take the company private and hand nearly 100% control to its largest bondholders. Shareholders, including Charney, would be left with nothing. 

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Charney supports an investor group including Hagan Capital Group that submitted two takeover offers in recent months, including a $300-million bid that was rejected last week by American Apparel's board.

The Hagan group favors returning Charney to the company. He was fired in 2014 after an investigation uncovered allegations of misuse of company funds and inappropriate behavior with employees.

Paula Schneider, who took over as chief executive last year, testified Wednesday that the board decided to reject the offer because its creditors didn't support it and it would also saddle the company with additional debt, according to Bloomberg.

Schneider said the company could be dragged into lengthy lawsuits if the takeover offer was accepted, Reuters said. But Charney's attorney questioned the review of the bid by Moelis, an investment bank that American Apparel hired to look at its strategic options, the report said.

Schneider also said that American Apparel needed a strong hand when she came aboard, lacking a more typical corporate structure or chain of command, according to media reports. She said that more than 70 people reported directly to Charney.

Charney, who was scheduled to testify Wednesday, is expected to take the stand Thursday instead.

The bankruptcy proceedings this week could represent the last real opportunity that Charney has to regain control of American Apparel. Chad Hagan, managing partner of Hagan Capital Group, said in a deposition that he does not plan to sue American Apparel or its bondholders in order to take over the company.

"I'm anxious," Charney told Reuters on Wednesday. "I put a lot of years into this company."

Under the reorganization agreement, more than $200 million in bonds would be eliminated in exchange for shares in the reorganized company – a transaction known as a debt-for-equity swap. The participating lenders are led by hedge fund Monarch Alternative Capital.

American Apparel's new owners will face many obstacles at the financially ailing company. American Apparel hasn’t turned a profit since 2009. A year-long turnaround implemented by Schneider has failed to boost its sagging sales. In November alone, the retailer reported a net loss of $14.5 million, according to its monthly operating report.

Follow Shan Li on Twitter: @ByShanLi

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