California Apparel News

A Los Angeles Superior Court judge granted a default judgment against Louis Verdad Inc. in a case brought against the Los Angeles designer by his former factor, Kracksmith Inc., d.b.a. American Business Fund (ABF).

The June 19 decision brings to an end one part of a quietly fought battle between Verdad and American Business Fund over the past eight months, but the two sides disagree about the impetus of the dispute. ABF maintains that this is simply a matter of recouping money owed. Superior Court Judge Maureen Duffy-Lewis issued a default judgment against Verdad of $467,505, according to ABF Managing Partner Boz Lee.

But Verdad and Kevin Hernandez, his business partner, maintain that ABF had been looking to take an ownership stake in Louis Verdad Inc. since the factor first began working with the designer brand in early 2007.

Kracksmith filed two suits, both in Los Angeles Superior Court. The first was filed against Verdad and Louis Verdad Inc. in October 2007; the second was filed against Hernandez in January 2008. Hernandez was originally named in the suit against Verdad, but the case against Hernandez was dismissed shortly before Kracksmith filed the separate case against him. Hernadez, a former magazine publisher, filed a countercomplaint against Kracksmith in April.

In the suit filed against Louis Verdad Inc., Kracksmith said it agreed to advance production funds, eventually totaling more than $163,000, to Louis Verdad Inc. in exchange for “security interest in Verdad Inc.’s assets,” as outlined in the factoring agreement. The suit further alleges that, at the time, Louis Verdad Inc. had more than $500,000 in orders but due to subsequent production problems, the company was only able to fill $80,000 in orders.

Verdad said he did not contest the allegations against him because he had been advised that the time to appeal was after the bankruptcy filing was complete.

Hernandez’s cross complaint charges ABF with changing the terms of the factoring agreement, effectively cutting off Louis Verdad Inc.’s ability to finance production.

According to Hernandez and Verdad, the two declined ABF’s request for an ownership stake in Louis Verdad Inc. when the two companies first began negotiating a factoring agreement in February 2007.

The relationship between the two companies was already on shaky ground by May, when ABF began suggesting Verdad produce a lower-priced line in China, according to Verdad and Hernandez. The business deal further deteriorated by June 2007, according to Verdad and Hernandez, and in early September, ABF appointed its own production managers to head up the entire Louis Verdad company, according to Hernandez’s suit. In addition, several salaried employees at Louis Verdad Inc. were told they were now independent contractors. By mid-October, ABF had seized control of equipment, patterns, fabric and other assets from Verdad’s former headquarters on London Street in Los Angeles. By December 2007, Hernandez had filed for bankruptcy protection for Louis Verdad Inc.

As the deal unraveled, Louis Verdad’s Fall deliveries were only “sparsely filled,” according to Louis Verdad Inc. National Sales and Marketing Manager Jason de Sah. Orders for Holiday, Resort, Spring I and Spring II were never put into production. “We had huge sales on Holiday,” de Sah said. “If we had shipped it, we could have paid a lot of debt and paid the employees.”

According to Verdad, between Fall and Spring deliveries, more than $800,000 in orders went unfilled because of lack of funding.

ABF dismissed all of Hernandez’s charges in a response to the cross complaint filed with the court.

In Kracksmith’s suit against Verdad, ABF’s Lee said the company had been told that Louis Verdad Inc. had $250,000 in inventory, including $70,000 in finished product and the rest in work. However, Lee said the value of the inventory has declined since the initial seizure.

“I believe the value of Verdad’s inventory is now much less due to seasonal fluctuations and my belief that the work in process was not completed nor the inventory delivered by Oct. 31,” said Lee in a statement filed with the lawsuit.

Lee declined to comment on the case, noting in an e-mail that “Louis Verdad Inc. is still very active in the marketplace, and we should all be careful of the implications of passing potential damaging information in the marketplace.”

ABF recently launched a Web site with an e-commerce section under the Louis Verdad brand.

One point of dispute remaining is the Louis Verdad trademark, which Kracksmith maintains was among the assets legally acquired following the Louis Verdad Inc. bankruptcy filing. However, Verdad and Hernandez said the trademark was never owned by Louis Verdad Inc. Instead, the two said they jointly own the trademark through a separate holding company, VHIP Inc. The two said Verdad is a 60 percent owner and Hernandez owns the remaining 40 percent.

“There isn’t a dispute to the ownership of the trademark, as it was pledged to American Business Fund as collateral in consideration for the loan,” said ABF’s Lee. “American Business Fund is enforcing its rights under law to collect on its loan. Nothing more.”

Kracksmith’s suit against Hernandez is scheduled for a hearing in November. Verdad is currently evaluating his next move. He recently met with potential investors and is planning to regain control of his trademark. “I need to understand what happened because my lesson to learn is already there,” Verdad said. “I feel like my name, my reputation, my livelihood have been taken from me.”

Star quality

Verdad’s star in the fashion community rose quickly after his launch in 2001. Designing custom pieces out of his garage in Los Angeles’ Silver Lake neighborhood, Verdad was soon dressing actresses such as Milla Jovovich and Rebecca Romijn.

Verdad started in menswear but then shifted to women’s apparel, reinterpreting the tailored aesthetic in feminine silhouettes. He started small—designing pants with an eye on fit. As his line grew, he retained his emphasis on fit and his flair for tailoring and menswear details. Within a few years, he soon caught the eye of Gen Art, appearing in its Fresh Faces in Fashion runway show in October 2003.

That year, Verdad was tapped by stylist and costume designer Arianne Phillips to dress Madonna for her “American Life” tour and for the MTV Music Video Awards.

Working out of his Silver Lake studio on London Street, Verdad’s collection—and his fame—continued to grow. Everything was produced in Los Angeles, and within a few years, the collection was carried in high-end retailers including Neiman Marcus, Nordstrom, Saks Fifth Avenue and Henri Bendel, as well as specialty boutiques and some overseas retailers in Hong Kong, Canada, Moscow and Korea.

In 2005, Phillips again returned to Verdad for a book project she was curating. Verdad was among four designers featured in the Los Angeles section of Phaidon Press’ book “Sample,” which celebrated “100 of the world’s most creative and outstanding young fashion designers.”

That year he also travelled to Beijing with California Gov. Arnold Schwarzenegger to participate in an exclusive runway show featuring several Los Angeles designers.

Verdad has been a long-time participant on the runway at Mercedes-Benz Fashion Week at Smashbox Studios in Culver City, Calif., and his theatrical shows were a highlight on the roster, drawing a fashionably famous audience that included Vogue Editor in Chief Anna Wintour, designer Michael Kors, Saks Fifth Avenue Fashion Director Michael Fink, actress Lucy Liu and socialite Paris Hilton.

Last October, his designs were on the runway at independent fashion week BoxEight, where Los Angeles Mayor Antonio Villaraigosa was among the notable guests in the crowd.

“Louis Verdad epitomizes the American dream—an immigrant whose hard work and extraordinary talent helped him rise to the top of his field,” said Cynthia M. Ruiz, president of the board of public works for the city of Los Angeles and one of the organizers for the mayor’s “Voices of Fashion” workshop. “His designs are elegant and classy, making woman feel beautiful. He is an established L.A. designer who is passionate about his work.”

These days Verdad is still fielding calls from stylists and publicists looking to dress their clients in his designs. In May, Verdad showed pieces from his archive at a runway show in Acapulco, Mexico. Later that month, he was once again on the catwalk in Mexico to stage a retrospective fashion show and pick up an award as guest designer at Brother International Fashion View, a 12-year-old design competition in Mexico City.

Familiar territory

Verdad’s plight is a familiar one for many designers. Several well-known designers have split either temporarily or permanently from the brands they launched after a failed business deal. Some, like William Beranek, founder of William B, and Jeff Lubell, cofounderof Bella Dahl, leave the original label behind to launch new brands. Beranek now designs the Nickel collection, and Lubellis the chief executive officer of True Religion Jeans.

For some, the loss is truly personal: They lose the right to use their name. Paul FrankIndustries ousted designer and co-founder Paul Frank Sunich, eventually barring Sunich from using his name. Parisian designer Herve Leger left his namesake brand shortly after it was acquired by BCBG Max Azria. Joseph Abboud recently lost the right to use his name for his new Jaz label after a bitter battle with JA Apparel, which purchasedthe Joseph Abboud label from the menswear designer in 2000.

Even retailers can fall victim to the same fate. Shauna Stein, the former buyer for the On Beverly and On Sunset boutiques in Los Angeles, lost the use of her name for her namesake boutique at the upscale Beverly Center mall after a partnership went sour.

After a much-publicized dispute with Prada Group executives, German designer Jil Sander left—and returned and left again— her namesake label after it was acquired by the Milan, Italy–based luxury house. These days the Jil Sander brand is designed by Raf Simmons.

The loss of a designer’s name is not only common, it’s a growing trend, said Ilse Metchek, executive director of the California Fashion Association.

“I have seen this time and time again,” she said. “The product used to be more important to the sale of a business in any succession planning. It’s not the most important thing now. Intellectual property is the most important thing.”

Metchek said designers need to take steps to protect their trademark before they enter any partnership arrangement. She noted that many designers fail to understand that a potential buyer or financial partner is most interested in their brand—and the brand equity built into it.

“The reality is if you, as a designer, think it’s your product that someone wants to buy or wants to be partner with, it’s not. It’s your name,” she said. “Either set a higher value to it or be prepared to start all over again.”