Designer Shirts is a supplier to Classic Stores (Classic), a major national retail outlet. There are rumours that Classic is in trouble, but the company has been in trouble before and has managed to recover. Industry experts say that there is too much at stake to allow the company to fail. Furthermore, this is a troubled industry, and if all suppliers believed everything they heard about their customers, they would never make a sale.
Classic has recently made an announcement about an infusion of cash from a major investor. On the basis of this news, Designer Shirts agrees to make deliveries, although it insists on a shorter payment period than normal. Designer makes the first delivery of summer stock at the end of March. It receives its payment within the specified 20 days. It then makes a second delivery, but this time payment is not forthcoming in 20 days. Based on further promises that the payment will be made within two days, Designer makes a third shipment. Within 10 days there is an announcement that Classic has filed for bankruptcy protection. Designer has received payment for neither the second nor third shipment and is owed $1.5 million.
What are Designer’s rights and prospects? Could Designer have better managed its risk in this situation?