According to insiders, American Apparel will be filing for Chapter 11 bankruptcy protection again, making it the second time the company has filed.
American Apparel Expected to File Bankruptcy Again
After exiting bankruptcy this past February, it looks like retailer American Apparel will be filing for a second bankruptcy as soon as within the next few weeks. The second filing will be an end to the last few years of struggles, including failing sales and a controversial split with its original founder, that the company has faced. In 2014 it was decided that founder Dov Charney leave the company following allegations of misconduct.
The company only exited from its first bankruptcy this past February. At that time bondholders, including Monarch Alternative Capital, took over the company. The pThe plan to turn around the store’s sales by focusing on original classics that made the company what it was, items such as basic tees, did not improve sales.
While word has not been made official, it’s expected that the bankruptcy will be announced shortly.
In addition to financial woes, the company is also in the midst of a management turnover. When Charney was fired from the company in 2014 following allegations of misconduct, Paula Schneider took over as Chief Executive Officer. Schneider resigned in September and now heads apparel maker DG Premium Brands. General Counsel Chelsea Grayson, a former mergers and acquisitions lawyer, took Schneider’s place.
Earlier in the month, brand licensors Authentic Brands Group LLC and Iconix Brand Group Inc. expressed interest in acquiring American Apparel. It appears that negotiations with these licensors could lead to a bankruptcy.
How Chapter 11 Can Help if You Are a Struggling Business in Arizona
Many businesses have been hit hard by the recent economic downturn. Many businesses struggle to meet tax, payroll or other debt obligations — and many find they have fallen too far behind to catch up without having to terminate operations. When faced with this option, Chapter 11 bankruptcy may be your best option for relief.
Chapter 11 bankruptcy allows large businesses to restructuring debt and continuing operations under a plan of reorganization supervised by the bankruptcy court. At the Phoenix law office of AZBK Lawyers, we will help you understand your rights, options and obligations under Chapter 11 and determine if it is the right choice for your business.
The Chapter 11 Bankruptcy Filing Process
The Chapter 11 bankruptcy process begins with the filing of a petition in bankruptcy court. Typically the debtor in these cases are corporations, partnerships, and limited liability companies. It should be noted that individuals are able to file Chapter 11 if they have too much debt or income to be able to qualify to file for Chapters 7 and 13.
While Chapter 11 is usually voluntary, sometimes creditors will file an involuntary Chapter 11 against a defaulting debtor.
Typically a debtor will file Chapter 11 where their primary place of business is located, but debtors are also able to file where they are “domiciled." This just means where the business is incorporated or otherwise organized. The process can take anywhere from a few months to be finished, or can continue up to six months to two years.
Business Operations Typically Continue But Court Handles Major Decisions
While most Chapter 7 cases require that a trustee be appointed, a trustee is usually not appointed in Chapter 11. Rather, a debtor will continue day-to-day business operations as a “debtor in possession” (DIP). A bankruptcy court is able to appoint a trustee if it feels that the debtor has committed fraud, dishonesty, incompetence, or gross mismanagement of the debtor’s affairs.
Though a debtor is able to continue business operations, most major decisions are handed over to a bankruptcy court. Additionally, the bankruptcy court must approve the following:
- any sale of assets, including property or real property. This excludes inventory sold by a retail debtor during ordinary course of business
- either entering or breaking a lease of real or personal property
- mortgages or other secured financing arrangements thatwill allow a debtor to borrow money after the bankruptcy case is filed
- shutting down business operations
- expanding business operations
- entering or modifying contracts and agreements with unions, vendors, licensees or others and,
- retention of and payment of fees and expenses to attorneys and other professionals.
Creditors Support or Oppose
Creditors, shareholders, and any other parties that hold an interest in the company have the option of either supporting or opposing actions requiring bankruptcy court approval. And the bankruptcy court must consider input from creditors, shareholders, and all other parties with an interest when deciding on how to proceed with the bankruptcy.
Unsecured Debt is not associated with a specific piece of property, which means that there is not specific property that serves as collateral for the debt. Unsecured creditors are able to participate in a Chapter 11 case through a committee that is appointed to represent all of the unsecured creditor’s interests.
Chapter 11 Reorganization Plan
A debtor typically has four months after filing Chapter 11 to propose a reorganization plan. These four months are usually considered exclusive, meaning that the debtor has the exclusive right to come up with the plan. This plan can also be extended or shortened.
After that “exclusivity period” expires, the creditors’ committee is able to propose a reorganization plan, although this is rare. Typically if creditors are dissatisfied with the debtor’s proposed plan, it will move to dismiss or convert the case to Chapter 7.
Confirmation of Chapter 11 Plan
Once a plan is approved it is referred to as “confirmation.” For a Chapter 11 plan to be confirmed, the plan must meet a number of requirements, including:
Feasibility. The proposed plan must be likely to succeed. This means that a debtor must be able to prove to the court that it will be able to raise enough revenue to cover its expenses over the plan term. This includes making all payments to creditors.
Good Faith. The plan must be proposed in good faith and not by means forbidden under applicable law.
Best Interests of Creditors. The plan must be in the best interests of its creditors. This means that creditors will receive as much in Chapter 11 as they would have if the debtor had gone through Chapter 7. Sometimes this means that a debtor will be required to pay creditors in full rather than just a fraction of what is owed.
Fair and Equitable. The plan must be deemed “fair and equitable” under the “fair and equitable” test. This means the following must be met:
- Secured creditors (creditors that have a mortgage against real property or a lien against personal property included inventory or equipment) must be paid, over time, at least the value of their collateral.
- The debtor is not able to retain anything on account of their equity interests unless all debts are paid in full. These debts can either be paid immediately following the confirmation of the plan, or over time. If paid over time, interest must be included. The bankruptcy court is able to allow equity holders (creditors) to retain ownership interests in the debtor in exchange for any “new money” that is contributed to pay expenses associated with reorganization of the debt. If this is not enabled by the court, equity holders lose all ownership rights once the reorganization plan is confirmed.
Some of the confirmation requirements apply only if the creditors vote against the proposed reorganization plan.
Working with a Bankruptcy Attorney
Attorney Ben Wright has the experience, skill and knowledge necessary to guide you through steps involved with a Chapter 11 bankruptcy. We will thoroughly review the financial situation of your business and if Chapter 11 is appropriate, prepare the petition and required schedules and documentation required by the bankruptcy court, including:
- Schedule of assets and liability
- Schedule of current income and expenditures
- Schedule of executory contracts and unexpired leases
- Statement of financial affairs
For individual filers, we will also provide a certificate of credit counseling and evidence of payment from employers, along with a statement of monthly net income and anticipated changes.
After filing the petition and schedules, we will then prepare and submit the disclosure statement and plan of reorganization with the bankruptcy court. The disclosure statement, which functions similar to a prospectus, must provide sufficient information about the business for creditors to make informed decisions about the debtor. The plan of reorganization — where there “rubber meets the road” — sets out the payment sequence, including priority of creditors, payment amount and timing. The confirmation process can be very time-consuming and energy-intensive, but you can take assuring knowing that attorney Wright will provide reliable and dedicated counsel every step of the way.
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix chapter 11 bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
AZBK Lawyers 668 N. 44th St., Ste 320, Phoenix, AZ 85008 (602) 648-3274