American Apparel founder Dov Charney sues former lawyers

March 18, 2016

(Reuters) – When all else fails in litigation – as it pretty much has for Dov Charney, the ousted CEO of American Apparel – the last resort is to sue your own lawyers.

This week, Charney filed a complaint against his former counsel at Glaser Weil Fink Howard Avchen & Shapiro in Superior Court in Los Angeles, claiming that the firm gave him bad advice on two contracts he signed in the summer of 2014, after the American Apparel board voted to suspend him as chairman and CEO.

Charney, who is representing himself in the malpractice and breach-of-contract suit against Glaser Weil, said in the complaint that the law firm did not have sufficient expertise in the complex Delaware corporate law issues that arose in a standstill agreement he entered with American Apparel and a financing contract he signed with the hedge fund Standard General.

In particular, Charney alleged, the firm failed to negotiate an indemnification provision that would have entitled him to the advancement of his legal fees. That oversight, the complaint said, “impaired my ability to defend myself since I could not afford the defense costs.”

Glaser Weil name partner Patricia Glaser said Charney’s complaint is “pathetic – shame on him.” She declined to comment on Charney’s specific allegations. Charney declined to provide a statement about the case.

Charney’s suit against his former lawyers stems from his attempt in 2014 to regain control of the company after he was suspended for allegedly misusing corporate funds and participating in a plan to publicize nude photos of a former employee who had sued Charney and American Apparel for sexual harrassment.

Charney, who remained the company’s largest shareholder after he was suspended, began threatening to lead a shareholder revolt against the board. To that end, he made a deal with Standard General, exchanging his voting rights for a loan that would allow him to buy up more shares in the company. Soon thereafter, he, American Apparel and Standard General entered a standstill agreement. As Chancellor Andre Bouchard of Delaware Chancery Court would later describe it in a 2015 summary judgment opinion, “the standstill agreement constrained Charney’s ability to run a proxy contest by contractually preventing Charney from acting to replace directors and from disparaging the company.”

In contract negotiations, American Apparel was represented by Skadden Arps Slate Meagher & Flom. Standard General had Debevoise & Plimpton. Glaser Weil was Charney’s counsel.

The standstill deal put in place procedures for the board to reach a determination on Charney’s possible reinstatement. But that backfired for Charney in December 2014, when the board voted to end his employment. And when Charney later criticized the board in public statements, American Apparel sued him in Delaware Chancery Court for violating the standstill agreement.

He responded with a suit of his own in Delaware, asking for legal fees to defend against American Apparel’s claims. Chancellor Bouchard ultimately granted summary judgment to American Apparel on the legal fees question, holding last September that neither the company’s charter nor Charney’s indemnification agreement gave him the right to be advanced his fees.

By the time Chancellor Bouchard ruled on Charney’s legal fees, Standard General had also sued him in Chancery Court for allegedly breaching the terms of their agreement and defaulting on the hedge fund’s loan. Charney filed a parallel case against Standard General in state court in Los Angeles and moved to stay the Delaware case. But because the agreement between Charney and Standard General included a forum selection clause directing disputes to Delaware, the California judge stayed the case there until the Delaware litigation concluded.

Charney’s new suit against Glaser Weil contends his former lawyers did not provide adequate advice about forum selection clauses.

Charney’s Delaware lawyers withdrew from representing him in part because he could not pay their bills. He’s now representing himself in the Standard General case. American Apparel’s case against him in Delaware was stayed when the company entered Chapter 11 bankruptcy last October. Charney does have counsel in his California suit against Standard General, several California defamation suits stemming from his ouster from the American Apparel board and an employment case against the company.

In January, American Apparel and Standard General received court approval for their plan to restructure the company from a federal bankruptcy judge in Delaware. The judge rejected a $300 million takeover bid from Charney and other hedge fund backers. Charney told Reuters at the time that he did not have enough money to post an appeal bond.

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