Los Angeles – The clothing chain, American Apparel (NYSE:APP), has filed for bankruptcy this Monday morning after calling for a $397.6 million in debt. The company comes from years of an increasing docket of complaints from vendors, employees, shareholders that led to numerous sexual harassment lawsuits aiming its infamous former CEO, Dov Charney.

Since the New York Stock Exchange notified the company of being at risk of expulsion from the exchange unless it complied with listing standards, American Apparel has announced that has reached a restructuring support agreement with 95% of its secured lenders to implement a pre-arranged financial restructuring.

Dov Charney, 45, founded the popular clothing brand in 1997. While he’s being suspended immediately, his employment contract requires 30 days before he can be terminated (2004). Credits: Business Insider

The restructuring will revitalize the business and brand by reducing the company’s debt and interest payments through the elimination of $200 million of its bonds in exchange for equity interests in the reorganized entity. It will also provide access to financing during the restructuring.

While the implementation, American Apparel will continue to operate its business without interruption to customers, employees and vendors.

“This restructuring will enable American Apparel to become a stronger, more vibrant company. By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy as we look to create new and relevant products, launch new design and merchandising initiatives, invest in new stores, grow our e-commerce business, and create captivating new marketing campaigns that will help drive our business forward” said Paula Schneider, American Apparel’s Chief Executive Officer in a press released by the company.

Financing the debt

The restructuring agreement, if approved will lead creditors like Monarch Alternative Capital, Coliseum Capital and Goldman Sachs Asset Management to exchange their bonds for equity and own the reorganized company. These creditors have committed $70 million of new capital to support the reorganization and recapitalization of the business, which is estimated as enough to fund the company’ ongoing operations and carry a successful reorganization. The objective is to reduce American Apparel’s debt from $300 million to no more than $135 million.

Sexual Harassment

Dov Charney, American Apparel’s founder came up with the idea for the store in his dorm room at Tufts University back in 1989. The intention was to sell only US-manufactured clothing with attracting explicit advertising.

However, Charney was fired as CEO in 2014 by the Board of Directors, after facing several lawsuits brought by former employees accusing him of sexual harassment. Allegations included making an 18-year-old sales clerk his “sex slave”, masturbating repeatedly in the presence of a female journalist and sent explicit texts to employees.

His rampant misconduct cost the company about $7 million by the time to “resolve certain sexual harassment, sexual assault and battery, racial discrimination and other claims against Dov Charney as well as severance claims and a claim relating to a 2011 employee fatality” as reported Fast Company.

What went wrong?

Despite the allegations for harassment, Charney did manage to build a solid clothing manufacturer that was once recognized for its “Made in America” policy, which avoided cheaper sweatshops in Asia to supported US manufacturing industry. Charney also paid double the minimum wage to his mainly immigrant workforce and provided health insurance and free international telephone calls to employees.

But all this wasn’t enough to keep up with American Apparel’s high prices and sale started to slumped while debts mounted. After American Apparel’s board fired Charney as chairman in June 2014 and sacked him as chief executive in December for sexual misconduct, the rising cost of defending the company from lawsuits against Charney and potential backers could not deal with a firm with Dov’s dirty reputation.

Source: American Apparel