Protecting Your Inventory And Getting Paid

• Published date: 20 May 2020
• Author: Mr Theodore Max and Alan H. Martin
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Sheppard Mullin Richter & Hampton

You've worked so hard to get your foot in the door with that prized retailer, striving mightily to please them. They've finally supported your line and you just shipped them a big order for Fall 2020. But that same retailer has now filed Chapter 11. What can you do to protect your inventory in the bankruptcy proceeding? Should you continue to do business with the retailer during the bankruptcy? And what can you do to avoid these problems in the future with other retailers? This article will briefly address these questions and provide some basic strategies to help guide the designer/manufacturer in these difficult times.

Getting Paid Before A Bankruptcy Petition Is Filed

Purchasing goods on a wholesale basis with a purchase order does not by itself afford protections for a designer/manufacturer. As discussed below, certain protections are afforded by the Uniform Commercial Code ("UCC"), which applies to the sales of goods, with respect to reclaiming goods. Before any bankruptcy is filed, care should be taken to be in communication with the retailer to ensure that the designer/manufacturer's level of exposure is limited by inserting closer to delivery or COD payment terms and limits on the size of orders. Care should also be taken to monitor the financial condition and credit conditions of the retailer and the timing of payments, the source of payments and any change in purchasing patterns.

Tools To Ensure Payment

A designer/manufacturer can minimize risk of non-payment by requesting a letter of credit, a third party guaranty, surety or security. A letter of credit is a written undertaking from a financial institution to pay upon certain terms such as shipment and delivery of conforming goods. This will ensure payment even if the retailer is unable to pay but letters of credit are difficult to obtain as part of a retail transaction. A third party guaranty represents a promise by another party to stand in for the retailer and to make payment if the retailer defaults on its obligation of payment. Guaranties must be in writing and the terms and conditions of the guaranty should be carefully drafted. A surety entails contracting with a third party, such as a bonding company to be responsible for payment much as a guarantor is liable.

Consignment Arrangement

A consignment arrangement generally involves a seller ("consignor") delivering goods to a consignee under a bailment arrangement where the consignor retains ownership while the consignee holds the goods for...