Firing a key executive can have repercussions beyond a severance dispute or a wrongful termination or discrimination claim by the executive. American Apparel’s recent termination of its CEO, Dov Charney, provides the latest example of the wide-ranging consequences that can arise when a C-level employee is let go. In American Apparel’s case, the consequences have included the threat of default on a $15 million loan and a resulting shareholder lawsuit.
How did this happen? According to the New York Post, when Lion Capital LLC lent American Apparel the $15 million, the two entered into a lending agreement that said American Apparel would be in default if it fired Charney. After American Apparel’s board told Charney it was going to fire him in 30 days, Lion Capital accelerated its demand for payment on the loan, threatening the company with bankruptcy. American Apparel argued in an SEC filing that it wasn’t in default because Charney was still technically CEO. However, it continued to work behind the scenes to remedy the situation. Now, the company now appears to have struck a deal with a hedge fund to save it from Chapter 11.
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