Ex-American Apparel CEO Loses Advancement Claims

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By Michael Greene

Sept. 11 — Former American Apparel Inc. chief executive Dov Charney is not entitled to an advancement of his expenses incurred in defending against a lawsuit filed by the company, the Delaware Chancery Court ruled Sept. 11.

In May, the company sued its former CEO accusing him of violating a “Standstill Agreement” by launching a campaign to retake control of the company he founded. Subsequently, Charney June 4 filed a complaint in the chancery court claiming that the company had wrongfully denied his demand for an advancement of his litigation costs.

Siding with the retailer, Chancellor Andre G. Bouchard concluded that Charney is not entitled to an advancement under either the company's charter or his indemnification agreement.

Not ‘Related to the Fact.'

The advancement provision in Charney's indemnification agreement mandates advancement for events or occurrences “related to the fact” that he was an officer or director of the company.

Bouchard reasoned that this phrase is equivalent to “‘by reason of the fact' found in Section 145 of the Delaware General Corporation Law, which requires a nexus or causal connection between the claims in the underlying proceeding and one’s official corporate capacity to obtain advancement.”

“Construed as such, Charney is not entitled to advancement for the claims asserted in the Standstill Proceeding because none of them implicate his use or abuse of corporate power as a fiduciary of American Apparel,” the judge wrote.

The court also found that Charney was not entitled to advancement under the company's charter because it only mandated advancement for current officers or directors and he held neither of these roles at the time he was sued.

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. In May, 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.”

Charney only sought advancement for the “Standstill Agreement” costs.

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

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/DOV_CHARNEY_Plaintiff_v_AMERICAN_APPAREL_INC_Defendant_No_11098CB/1.

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