FROM OUR JULY 2024 MR AWARDS ISSUE: WHEN RETAILERS DON’T PAY THEIR BILLS

by Douglas Hand

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You painstakingly designed, showed, marketed, and produced a great line. The response from wholesale accounts was strong. Several retailers placed large orders, and you shipped and delivered on time. Your payment terms were industry standard—which is to say very much in favor of the retailer—but 120 days have passed, and you still have not been paid the full amount of your invoice. What do you do?

The point at which vendors need legal help to precipitate payment is a nuanced question. Your purchase order is a valid legal agreement and, at its core, provides that you are entitled to payment (unless there is an RTV provision or some deficiency with your product or delivery of which the retailer has made you aware). But are you really going to sue to collect? In an era when even major department stores are known to be delinquent, this topic is particularly relevant.

You may be using a financial factor. If so, assuming you entered into a proper factoring agreement where the factor owns your approved accounts receivable, the problem is now theirs, i.e., you’ve already been paid for the goods, and it’s the factor who is tasked with collecting. But what if you’re not using a factor or this account wasn’t approved? Again, bringing a collection action is relatively easy but really burns a bridge. Are you prepared to lose this account potentially forever? Perhaps that’s acceptable if it’s a small retail account, but what if it’s your biggest account? If it has come to the point where you’re considering suing, that retailer may be teetering on the brink of bankruptcy. If that’s the case, even once you’ve secured a judgment against the retailer, that judgment will become just another creditor claim, with no security interest in any of the retailer’s assets, not even the very inventory you never got paid for.

To mitigate the downside of an insolvent retailer declaring bankruptcy and effectively making your delivered but unpaid inventory an asset of secured creditors, brands
can consider novel structures like selling the inventory through the retailer on consignment and then, as odd as it may sound, filing for a security interest on your own inventory. This, at least, can put a brand on equal footing with secured creditors.

Additionally, if the brand learns that the retailer is insolvent, a reclamation demand can be sought. Reclamation is one of the most desirable alternative methods of recovery from an insolvent retailer. Reclamation demands result in the vendor being able to reclaim the goods that have been sold to the retailer while insolvent before the debtor files for bankruptcy.

So the points at which vendors should seek legal help is before the order is placed, or before the retailer files for bankruptcy. At these points, legal counsel can weigh in on whether a factor should be used or perhaps a consignment agreement with security interest. As in many legal situations, prophylactic measures are better than reactive ones.

Douglas Hand is one of the preeminent fashion lawyers in the country. His industry bona fides include being a member of the CFDA Fashion Awards Guild, chairman of the board of FIT, professor of fashion law at NYU and Cardozo Schools of Law, and recognized Super Lawyer for the past 10 years. He can be reached at dhand@hballp.com.

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