Debevoise Prevails in Recouping More Than $20 Million for Standard General from American Apparel Founder

22 January 2021

Debevoise & Plimpton LLP prevailed again this week in a long-running saga in which its clients, Standard General, L.P., Standard General Master Fund L.P., and P Standard General Ltd.(collectively “Standard General”), sought to enforce various loan and governance agreements between Standard General, American Apparel, and the disgraced founder and former CEO of American Apparel, Dov Charney. This week’s ruling affirms that what three prior courts have held – that Standard General is entitled to recover more than $20 million from Charney.

Standard General sued Charney in Delaware Chancery Court in 2015 seeking to enforce the parties’ agreements and for repayments of $19.5 million in loans it made to Charney to purchase shares of American Apparel stock. In December 2017, the Delaware Chancery Court granted Standard General’s motion for judgment on the pleadings, validating the agreements and holding Charney liable for his breach and for repayment of the loans plus interest.

That decision was affirmed by the Delaware Supreme Court in September 2018 and, in February 2019, Debevoise also secured a ruling dismissing prior claims Charney filed in California that had been stayed in favor of the Delaware litigation, and could have further delayed enforcement of the Delaware judgment, on the grounds they were precluded by the Delaware decisions. Charney’s California claims concerned the same facts and allegations Charney alleged as “affirmative defenses” in the Delaware action, but included a state securities fraud claim that Charney argued on appeal should still be heard in California.

This week, less than one-week after oral argument, the Court of Appeal of the State of California, Second Appellate District, District Four, issued a ruling affirming dismissal of Charney’s securities fraud claim on the very same grounds set forth in Standard General’s moving papers and appellate briefing. Charney’s claim was barred by the doctrines of res judicata and collateral estoppel and was insufficiently plead: Charney failed to plead any material misstatement or omission of fact that induced him into the agreements, as the relevant statute requires.

The alleged extra-contractual promises he claimed induced him into the agreements (that Standard General would re-install him as CEO of American Apparel) were contradicted by the written contract he signed and no reasonable investor could therefore have relied on them; not to mention the statute Charney sued under barred claims of fraud where a plaintiff like Charney knew the truth of the alleged fraud he claimed.

The Debevoise team was led by partner Shannon Rose Selden, who leads the firm’s Asset Management Litigation practice, and includes associate Justin Ferrone.