Embattled Ex-American Apparel CEO Sues Company For Advancement

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By Michael Greene

June 5 — In the latest in a busy legal battle, ousted American Apparel Inc. CEO Dov Charney is now seeking an order compelling the retailer to advance his fees and expenses incurred in connection with a lawsuit the company filed, according to a June 4 complaint in the Delaware Chancery Court.

Last month the company sued its former top executive, accusing him of violating a “Standstill Agreement' by launching a “scorched earth campaign” to retake control of the company he founded.

Charney now alleges that the company has wrongfully denied his demand for advancement in defending that lawsuit.

“In light of the Corporation’s broad advancement obligations, American Apparel has no justifiable basis for its refusal to honor Mr. Charney’s advancement rights,” his complaint states.

Personal vs. Corporate Capacity

Like many advancement and indemnification lawsuits, Charney's right to fees and expenses may come down to whether they arise out of defending claims related to his role as a director and officer of the company, or those arising in his “personal capacity.”

According to the complaint, American Apparel denied the demand for advancement based on the argument that it had not asserted its lawsuit “by reason of fact that Mr. Charney is or was a director, officer, employee or agent of the Company.”

However, Charney claims that the employment agreement and the corporation's bylaws provide for broad mandatory advancement rights, and that the American Apparel lawsuit is “related to the fact” that he was an officer of the company.

Recently, the chancery court clarified when an officer is defending claims in his or her personal or official capacity triggering advancement rights.

Ongoing Legal Battle

In June 2014, American Apparel's board voted to suspend Charney and later fired him for alleged misconduct. In doing so, the directors alleged that he violated the chain's policies against sexual harassment and improperly used company funds.

Last month, the former CEO filed a defamation lawsuit against the company and investor Standard General LP in California state court over his ouster.

Subsequently, the company fired back by filing its own lawsuit alleging that Charney violated the “Standstill Agreement.” The company won an early victory in the lawsuit when Chancellor Andre G. Bouchard June 1 granted American Apparel's request for a restraining order preventing the fired CEO from making disparaging statements and actions to influence or support third parties ahead of the company's annual meeting July 18.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The complaint is available at http://www.bloomberglaw.com/public/document/Dov_Charney_vs_American_Apparel_Inc_Docket_No_11098_Del_Ch_June_0/1.