Dov Charney, the founder and former CEO of American Apparel. Photo Credit: Dov Charney/Flickr

Former American Apparel CEO Dov Charney could have to pay up to $19.5 million that he owes to a hedge fund from a fight to regain control of the company he helped to found, Delaware's Court of Chancery has ruled.

Chancellor Andre G. Bouchard on Tuesday upheld as valid a series of agreements Charney struck with Standard General shortly after his ouster over accusations of sexual harassment and mismanagement in 2014, rejecting Charney's claims that the New York-based investment firm had duped him with promises it never intended to keep.

In a 65-page memorandum opinion, Bouchard slammed Charney's “kitchen sink” of defenses to Standard General's suit as “illogical” and agreed that Charney had violated the agreements by challenging their terms in California state court.

“I conclude that Charney could not have reasonably relied on any of these alleged false promises because they directly conflict with the terms of the eight written agreements he signed, and that his other affirmative defenses fail as a matter of law and undisputed fact,” Bouchard said in granting standard general judgment on the pleadings.

The ruling has now cleared the way for Standard General to recover a principal of $19.5 million, plus interest, on the loan that it made to Charney to help fund what turned out to be an unsuccessful proxy battle to retake his grip on American Apparel, which has since gone through two bankruptcies.

According to court documents, Charney borrowed the money in order to increase his holdings in the company to 43 percent so that he could launch a proxy contest to replace the board that had suspended him in the wake of the allegations. Charney denies any wrongdoing and maintains that the accusations against him were fabricated.

After the company pushed back, however, Charney, Standard General and American Apparel entered a standstill agreement that reconstituted the board and established a committee to investigate misconduct allegations and decide whether Charney should return to the board. Separately, Charney and Standard General signed a string of agreements to define their relationship over the months that followed.

The committee in December 2014 voted against reinstating Charney, and the new American Apparel board terminated his employment for cause, sparking a flurry of litigation in multiple forums.

Charney sued in California, asserting that the agreements he had entered with Standard General were invalid and unenforceable, and Standard General responded with its own litigation in Delaware, asking the court to uphold the contracts and award damages under the loan it made to Charney.

In Delaware, Charney raised a slew of 11 affirmative defenses to Standard General's suit, arguing among other things that Standard General had fraudulently induced him with promises that he would return as CEO.

Bouchard, however, said that Charney's claims contradicted the plain terms of the agreements, which laid out a committee process to consider Charney's potential return and established limitations on the parties' voting power in light of the standstill agreement.

“Given the express language of these provisions, Charney could not have reasonably relied on any alleged representation that Standard General would be able to control the investigation and guarantee his return as CEO,” Bouchard said. “To the contrary, that determination would be made by the members of the suitability committee who were obligated to comply with their fiduciary duties as directors of a Delaware corporation.”

And by first filing suit in California, Bouchard said, Charney had breached Delaware exclusive forum provisions in the standstill and other contracts he had entered with American Apparel to avoid the proxy fight. Those breaches, in turn, triggered an event of default, making repayment on the principal and accrued interest payable immediately, more than two years ahead of the contractual due date.

“Standard General emphasizes (and I agree) that these breaches are not just technical because Standard General needlessly has been put through the burden and expense of litigating claims in California that Charney unequivocally agreed to litigate only in Delaware,” Bouchard said.

An attorney for Charney declined to comment, and an attorney for Standard General was not immediately available to comment on Wednesday.

Standard General was represented by Shannon Rose Selden, Derek Wikstrom and Justin Horton of Debevoise & Plimpton and Raymond J. DiCamillo and Matthew D. Perri of Richards, Layton & Finger.

Charney was represented by Mark M. Billion of Billion Law in Wilmington.

The case is captioned Standard General v. Charney.