Dov Charney ordered to pay $19.5M over American Apparel suit

Dive Brief:

The Delaware Supreme Court on Monday affirmed a Dec. 17, 2017, ruling that American Apparel founder Dov Charney must pay hedge fund Standard General $19.5 million. That figure is the principal amount of a loan from 2014 when the hedge fund was working to help Charney retake control of the retailer, excluding accrued interest. Charney had appealed the earlier ruling by the Chancery Court in Delaware.
In December, according to court documents, the Delaware Chancery Court ruled that verbal agreements that Charney claimed he had made with Standard General — in which he would hand over additional American Apparel shares he acquired with the loan in exchange for reclaiming his CEO position — didn't supersede written agreements he signed regarding the note.
In an interview with Retail Dive on Tuesday, Charney said that, when it comes to litigation, he is focused on a fraud claim being litigated in California, which had been stayed to wait for the Delaware Supreme Court's decision in the matter. In that case, Charney is suing American Apparel, members of the board at the time and Standard General. He alleges that, the Delaware courts' views notwithstanding, American Apparel and the hedge fund ran the company into the ground after his 2014 ouster. Standard General declined to comment to Retail Dive.

Dive Insight:

No court seems able to deter Dov Charney's assertion that financial interests overwhelmed American Apparel's chances to right itself years ago.

"They lent me money to aggrandize my ownership," he told Retail Dive of Standard General in an interview on Tuesday. He maintained, as he often has, that he plotted with the hedge fund to retake his company in order to save it from individuals and financial organizations interested in deriving whatever proceeds they could out of American Apparel rather than invest in a turnaround. "We were successful or they were successful — we did retake control. But then they tossed me out of the getaway car — and therein lies the fraud," Charney asserted.

But, according to court documents written by Delaware Chancellor Andre G. Bouchard in December, Standard General's position sidesteps all that, and is bolstered by what it got in writing. "Standard General's motion for judgment on the pleadings for (1) a declaration that the Agreements were valid and enforceable when entered into, and (2) an award of damages for amounts due under the loan it made to Charney," Bouchard wrote. "Charney made a deliberate choice not to assert any counterclaims but has asserted a kitchen sink of eleven affirmative defenses. ... I conclude that Charney could not have reasonably relied on any of these alleged false promises because they directly conflict with the terms of the eight written Agreements he signed, and that his other affirmative defenses fail as a matter of law and undisputed fact. Accordingly, Standard General is entitled to entry of judgment on the pleadings."

Charney seemed unfazed by the Delaware court's ruling this week, saying he's focused on his latest venture, Los Angeles Apparel, which has much in common with his former endeavor. Los Angeles Apparel is generating most of its sales to merchandise makers in the entertainment industry, just as American Apparel did in its early days, and is also manufacturing fashion items, in some cases for pure-play online apparel brands. Sales are on pace to reach $25 million to $30 million next year, he said, adding that he believes that the new company's swift ramp up, which has eclipsed American Apparel's early trajectory, is thanks in part to e-commerce.

Los Angeles Apparel differs from Charney's original company in some ways too, namely in that it is privately owned and run under a trust controlled by Charney's family, with small-dollar investments from many employees, according to Charney. Nearly all of the company's 350 to 400 employees are former American Apparel workers, he said. American Apparel, once known for its U.S.-made clothing, was bought at a bankruptcy auction last year by Canadian garment manufacturer Gildan, which has moved much of its manufacturing to Honduras.