Tarrant Apparel Group, which is in the process of being taken private by two founders, reported a large fourth quarter loss Wednesday due to a legal settlement and the loss of a major customer.

After the markets closed, the Los Angeles private label clothing maker reported a net loss of $5.8 million (-19 cents per share), compared with net income of $325,000 (1 cents) a year ago. Net sales fell 34.5 percent to $37.5 million.

The drop in sales was driven by its Private Label unit, which saw sales fall 46 percent to $24 million, mainly due to loss of business from the now-closed Mervyn’s department store chain. Offsetting the slump was 5.5 percent growth in its Private Brands unit as the company gained sales from the Macy’s Merchandising Group.

Goodwill impairment charges totaled $1.4 million as the company settled litigation with the American Rag Cie retail chain. The settlement forced the company to give up its 45 percent interest in American Rag Cie LLC.

The company recorded a fiscal 2008 net loss of $11.1 million (-35 cents), compared with net income of $1.7 million (6 cents) in 2007.

Tarrant Apparel last month signed a merger agreement with a company formed by Chairman Gerard Guez and Vice Chairman Todd Kay. Guez is the company’s largest shareholder and controls 33 percent of shares. The cash deal is valued at $15.2 million.

Prior to the earnings announcement, Tarrant shares closed down 1 cent to 70 cents on the Nasdaq.