Reference no: EM131624945
As a sole proprietor, Bill runs a dry cleaning store called Bill's Dry Cleaning. He is in deep financial trouble. His bank will no longer give him any credit and is threatening to demand immediate repayment of all money it has loaned to his business. Bill also owes money to other creditors and vendors.
Bill is desperate, so he approaches Christine, a very rich lady, and asks her to refinance his business. Christine reviews the business and its operations and says to Bill, "Listen, you're a great dry cleaner but a lousy businessman. I'll bail you out, but we have to divide up responsibilities a bit. If we're going to make this business work, we have to be more strict about it. First, no more credit to professors. They're lousy at paying their bills on time. Second, I want to determine who gets paid when. One of the arts of staying in business is stretching out your accounts payable. So, before you pay anyone, you check with me. Also, I want some upside potential. So long as you owe me money, I want 12% interest on whatever you owe me or 12% of the profits, whichever is higher. You pay me the 12% monthly, and quarterly I'll decide whether to keep the past three month's interest or take my share of the past three month's profits."
Bill accepts Christine's terms, with one condition: "We have to pay the employees on time. If we have the money, we pay them." Christine accepts Bill's condition, pays off the loan from the bank, and provides additional working capital to the business.
The business continues to operate under the same name, and no one except Bill knows about Christine's involvement. Bill stops extending credit to professors. Each month Christine reviews Bill's accounts payable and sets the priorities for payment as follows: (1) pay Christine the money owed her; (2) pay overdue bills from people Bill intends to buy from again; (3) pay overdue bills from other people who are threatening to sue; and (4) pay others. Christine never does take a percentage of the profit because the 12% interest figure is always higher.
Bill makes all decisions about which vendors to use. He also makes all personnel decisions (hiring, firing, salaries, etc.). After a year, the business fails. Bill owes Christine $350,000; he owes creditors a total of $150,000 and $25,000 in unpaid wages to three employees. Bill has no money left.
Can the creditors and the employees collect from Christine?