Seems like the right choice. If he's that backed up with orders he should probably just not take any new orders untill he has caught up on his work load. Seems like common sense unless he's struggling with bills and such where he has to keep taking orders to support himself financially.
But then again as soon as you filed a claim with paypal he says he can magically have it shipped within the week?? If he really wanted to keep your business and others he would stick to his estimated 12 week waiting period and any time over that period he should contact the customer and let them know the status.
Also if you have a business you NEED to stay on top of your emails. You can't just say oh well I forgot to answer my emails today. That's an aweful business habit that I have seen way to often and imo I will never order from a company who won't take the time to talk to me no matter how many times I contact them. Good business is good buiness and bad business is never forgotten.