The planned bankruptcy sale of teen-oriented retailer American Apparel LLC could unravel due to a roughly $100,000 dispute with a creditor over 248,011 pounds of raw fabric, according to court filings on Thursday. American Apparel said it urgently needs Tri-Star Dyeing & Finishing Inc to dye and hand over the fabric, which is being held back over a debt pre-dating the retailer's November bankruptcy, its second bankruptcy in just over a year.
The retailer filed an adversarial complaint against Tri-Star seeking to enforce its bankruptcy stay and bar the company from demanding payment and withholding the fabric. American Apparel said the fabric is "essential" for fulfilling orders for Gildan Activewear Inc, the Canadian clothing manufacturer offering to buy the retailer's brand and wholesale inventory. Gildan has bid $66 million, which will be tested at a Jan. 9 auction, American Apparel said.
The retailer made famous by its racy advertising said it would be hard pressed to complete Gildan's orders if Tri-Star does not dye the fabric by the end of the week. American Apparel also said it has been informed by lender Encina Business Credit LLC that its $30 million bankruptcy loan could be jeopardized over the dispute. If Tri-Star does not turn over the fabric or if there is a debt payment to Tri-Star, there may be cause for a default on the loan, the retailer said. Additionally, American Apparel said its manufacturing could be disrupted without the fabric.
The longer-term outlook for American Apparel's manufacturing already is in doubt. The Los Angeles-based company has notified more than 3,000 employees in California they could get pink slips, according to layoff warning notices filed with state officials.
The retailer emerged from its first bankruptcy in February after defeating a proposal by former chief executive Dov Charney to buy it back. American Apparel ousted Charney in 2014 over allegations of misconduct that cost the company millions in liabilities. He has denied the allegations and has argued the retailer has been mismanaged since his departure amid an increasingly complex retail market.
Last week, American Apparel's unsecured creditors' committee echoed Charney in court papers criticizing terms of the retailer's bankruptcy loan. The committee said the nine months between the retailer's two bankruptcy cases were marked by a failed turnaround strategy, staggering losses and broken promises to creditors.
* The case is In re American Apparel LLC, in the U.S. Bankruptcy Court for the District of Delaware, No. 16-12551.