October 15, 2009 6:33 PM

The Bankruptcy Files: Haute Couture Edition

Posted by Francesca Heintz

For all the glitz of Paris fashion week, one haute couturier was conspicuously absent from last week's event: Christian Lacroix. The fashion house bearing Lacroix's name--it was founded in 1987 by Bernard Arnault, the chairman of LVMH--did not stage a show. In fact, last week's event was the first time since its founding that Lacroix did not present a collection.

The reason? The fashion house, which filed for bankruptcy in May in Paris commercial court, has significantly scaled back its haute couture activities while the court-appointed judicial administrator, Regis Valliot, looks for a buyer.

Lacroix isn't the only high-end fashion company to fall into bankruptcy this year. In February, IT Holding SpA, which owns the Gianfranco Ferre label and makes and sells clothing lines for Roberto Cavalli and Donatella Versace through its licensing unit, was placed in bankruptcy administration. According to this Wall Street Journal article, the Italian government has placed IT Holding under three government-appointed supervisors to keep the group in operation.

The latest designer to seek bankruptcy protection: Yohji Yamamoto. The Japanese designer filed for bankruptcy in Tokyo on Friday with debt totaling $67 million. 

Francois Chateau, a corporate partner at Salans who represents luxury goods companies, says the smaller, younger houses, like Lacroix and Yamamoto, have been hit the hardest. "We currently represent four big names, two American and two French, that are absolutely struggling," says Chateau. "They're technically bankrupt and being held on life support in various ways."

Chateau expects more fashion houses to follow Lacroix and Yamamoto into bankruptcy. Finding new money in this economy is extremely difficult, he says. "There is very little appetite out there to buy these names," says Chateau.

Bankruptcy often is the only viable option for the fashion houses, even if they run the risk of diluting their brand by admitting they're broke. "Bankruptcies are expensive," says Carren Shulman, a bankruptcy partner at Sheppard Mullin Richter & Hampton, who works closely with the firm's fashion practice. "You want to have a plan to get out before you go in."

Yamamoto seems to have that figured out. On the same day the brand filed for bankruptcy, it announced that Integral Corp., a Japanese private equity fund, will finance its restructuring, according to Women's Wear Daily.

Lacroix, which has been soliciting suitors for a few months, also may have found its white knight. United Arab Emirates Sheikh Hassan Ben Ali al-Naimi made a formal offer on Thursday to buy the French fashion house, according to the AFP. The Paris competition tribunal is expected to make a decision on the offer by the end of the month.

To date, says Shulman, these bankruptcy proceedings are occurring outside of the United States, even though the companies have assets here. She says the companies may choose to file in the U.S. at a later date or may have made arrangements with its secured creditors in other markets already. (Shulman does not represent any of the creditors or debtors in these bankruptcies.) "It's important to know who your secured creditors are and then take whatever action is necessary in the markets they're located, so they don't try to go after your inventory," says Shulman.

According to Ted Max, head of the fashion practice at Sheppard Mullin, fashion houses might avoid some of these troubles by developing new business strategies. "What a designer does in terms of leveraging the brand matters," he says. "You make money by selling products to a different category of people and create a bridge from the lower-price goods to the higher-price goods. That's how fashion works, when it works."

Photo by Chris Moore/Catwalking/Getty Images-A model walks the runway at the Christian Lacroix fashion show during Paris Fashion Week Haute Couture Autumn/Winter 2009/2010 on July 7, 2009 in Paris, France.

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