The Los Angeles retailer said Lion Capital formally demanded repayment on Monday and told the retailer that the ouster of Dov Charney as chief executive last month triggered the notice under their lending agreement, according to a filing with the Securities and Exchange Commission.
American Apparel said it does not believe Lion Capital's claims are valid and may seek damages against the London investment firm for improperly accelerating payment of the loan.
The company warned last month that Charney's ouster by the board as chairman and chief executive could trigger defaults on nearly $40 million in loans, including with Lion Capital. The board's vote suspended him immediately, though a 30-day wait is required under his employment contract for termination.
American Apparel argued Tuesday that Lion Capital cannot call in the loan until Charney is officially fired as CEO on July 19, according to the filing.
A person familiar with the matter said Lyndon Lea, cofounder of Lion Capital, has stood behind Charney as chief executive and would support his reinstatement as head of the retailer he founded roughly two decades ago.
The company is now seeking permission from other lenders to pay the Lion loan; if it can get that approval, American Apparel said it would be able to fully repay Lion.
However, if those lenders do not permit repayment of Lion, another default may loom, American Apparel warned Tuesday. The company had said previously that a $30-million loan with Capital One could be called in early if the loan with Lion Capital went into default.
American Apparel could still be saved with funds from Standard General, the New York hedge fund that controls a 43% stake in the company after reaching a deal with Charney.
Standard General said last week it plans to introduce new board members and improve the management of the retailer, and may use its resources to help American Apparel avoid a bankruptcy or liquidation.
Even if American Apparel manages to avoid default, it faces a slate of other financial problems. The company has lost nearly $270 million in the last four years and is more than $200 million in debt. It is facing an interest payment of $13.5 million to bondholders in October.
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