BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 12 (Corbett)
As Amended January 4, 2012
Hearing Date: January 10, 2012
Fiscal: No
Urgency: No
RD
SUBJECT
Uniform Commercial Code: Bulk Sales
DESCRIPTION
Existing law, the Uniform Commercial Code-Bulk Sales Law
(California bulk sales law), governs bulk sales, as defined,
where the seller's principal business is for the sale of
inventory from stock, as specified, or that of a restaurant
owner, and where the seller is located in California, as
specified, on the date of the bulk sale agreement. The
California bulk sales law imposes certain requirements upon the
buyer in a bulk sale subject to the statute. Among these is
that the buyer must provide notice to the seller's creditors
that the bulk sale is taking place, as specified. In the event
of non-compliance, the California bulk sales law provides that,
subject to the good faith exception and specified limitations, a
buyer is liable for damages in the amount of the claim, reduced
by any amount that the claimant would not have realized if the
buyer had complied.
This bill would repeal California's bulk sales law and make
other conforming changes.
BACKGROUND
In the late-19th century, territories across the United States
experienced a need for laws that would protect creditors from
merchants who, all too frequently, would acquire inventory on
credit and later sell all or a substantial part of that
merchandise in bulk, thereafter absconding with the proceeds
without ever paying their debts. Creditors were often left with
(more)
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no recourse, having neither any protections nor remedies
available at common law in these situations, nor any feasible
mechanism to locate fleeing sellers. For example, Owner A sells
his convenience store to Buyer B and then leaves town without
ever having settled his debts with Creditor C. Under the bulk
sales law, Creditor C could then sue Buyer B for not applying
the bulk sales law and providing notice to Creditor C that the
transaction was occurring.
Compounding the problem was the limited framework of the era's
fraudulent conveyance law, which would only afford its
protections if there was collusion between the seller and buyer.
(See Revised Uniform Commercial Code (UCC) Article 6 (1989
Official Text), Prefatory Note, pg. 4
< http://www.lawrev.state.nj.us/rpts/ucc6.pdf > Ýas of Dec. 30,
2011]; Lisa M. Bruno, "Is Bulk Sales Legislation Still
Necessary," 1997 Det. C.L. Rev. 1091, 1091-1092.) To address
this "bulk sale risk," one by one, each state began adopting
bulk sales laws, eventually giving rise to Article 6 of the UCC.
The central purpose of these laws was to give the merchant's
creditors notice that a bulk sale is taking place in order to
afford them an opportunity to satisfy their claims before the
merchant can sell its assets to a buyer and disappear with the
proceeds of the sale without ever paying back its creditors.
(See generally 4 Witkin, Sum. Cal. Law (10th Ed. 2010) Sales,
Sec. 219; see also Reed v. Anglo Scandinavian Corporation (1969)
298 F. Supp. 310, 313 (citations omitted).)
Except as otherwise provided, California's bulk sales law
applies to a bulk sale (a sale not in the ordinary course of
business and for half or more of the seller's inventory and
equipment, as measured by value on the date of the bulk sale
agreement) if the seller's principal business is the sale of
inventory from stock, including those who manufacture what they
sell, or that of a restaurant owner and, on the date of the bulk
sale agreement, the seller is located in California, or if
located in a jurisdiction outside the U.S., the seller's major
executive U.S. office is in California. (See U. Com. Code Secs.
6101-6111.)
Since the original enactment of bulk sales legislation, the
legal landscape has evolved such that there are numerous laws
affording rights and remedies to creditors, including the
Uniform Fraudulent Transfer Act, as well as a national
Bankruptcy Code, and a UCC article providing for secured
transactions (Article 9; Division 9 in California). Moreover,
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modern technologies in conjunction with long-arm statutes make
it increasingly feasible for creditors to find and bring
absconding merchants back under the state's jurisdiction.
Thus, starting in 1988, recognizing the substantial obligations,
costs, and risks placed on buyers in bulk sales by the original
UCC Article 6 and the difficulty of complying with Article 6 in
multi-state transactions due to so many states' non-uniform
amendments, the National Conference of Commissioners on Uniform
State Laws (NCCUSL) and the American Law Institute (ALI) studied
Article 6 and its relationship to other creditors' rights
statutes. By 1989, they jointly recommended a repeal of the
bulk sales law ("Alternative A"). (See Revised UCC Article 6
(1989 Official Text), Prefatory Note, pgs. 4, 6
< http://www.lawrev.state.nj.us/rpts/ucc6.pdf > Ýas of Dec. 30,
2011].)
In recognition that some states would be disinclined to repeal
the law altogether, and in order to create a uniform version of
the law for those states, NCCUSL and ALI also approved a revised
UCC Article 6 ("Alternative B") that was designed to afford
better protection to creditors while minimizing the impediments
to good-faith transactions, as well as reintroduce uniformity
into the area. (See id. at 6.)
Since then, 47 states have repealed their bulk sales laws.
California is one of only four remaining jurisdictions in the
U.S. to retain a bulk sales law, having selected to adopt a
non-uniform version of Alternative B in 1990. (AB 3653 (Harris,
Ch. 1191, Stats. 1990).) Although California enacted the
"Alternative B" approach, it ultimately adopted it in a
non-uniform way and extensively modified it in order to retain
many features of the original version. (Witkin, Sum. Cal. Law
(10th Ed. 2010) Sales, Sec. 219.) As a result, the California
Commercial Code Division 6 differs from the 1989 revised UCC
Article 6 in significant aspects. California's law covers a
broader range of sales, contains a narrower exception for
buyers' good faith and commercially reasonable attempts to
comply, has more stringent requirements for certain transactions
involving $2 million or less, and lacks the "policing" section
of the UCC law which provides a required schedule of
distribution. (CEB California UCC Sales and Leases, Secs.
14.42-14.47.)
This bill, sponsored by the California Commission on Uniform
State Laws, would repeal California's bulk sales law in its
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entirety, remove any references to bulk sales throughout other
code sections, and make other conforming, non-substantive
changes.
CHANGES TO EXISTING LAW
1.Existing law , the Uniform Commercial Code - Bulk Sales
(California bulk sales law) governs bulk sales transactions in
the state. (U. Com. Code Secs. 6101-6111.)
Existing law defines "bulk sale" as either:
in the case of a sale by auction or a sale or series of
sales conducted by a liquidator on the seller's behalf, a
sale or series of sales, not in the ordinary course of the
seller's business, of more than half of the seller's
inventory and equipment, as measured by a value on the date
of the bulk-sale agreement; or
in all other cases, as a sale not in the ordinary course
of the seller's business of more than half the seller's
inventory and equipment, as measured by value on the date
of the bulk-sale agreement. (U. Com. Code Sec.
6102(a)(3).)
Existing law defines "assets" as the inventory and equipment
that is the subject of a bulk sale and any tangible and
intangible personal property used or held for the use
primarily in, or arising from, the seller's business and sold
in connection with that inventory or equipment, except as
specified. (U. Com. Code Sec. 6102(a)(1).)
Existing law applies, except as otherwise provided, if:
the seller's principal business is the sale of inventory
from stock, including those who manufacture what they sell,
or that of a restaurant owner; and
on the date of the bulk sale agreement the seller is
located in this state, as defined, or if the seller is
located in a jurisdiction outside the U.S., the seller's
major executive U.S. office is in this state. (U. Com.
Code Sec. 6103(a).)
Existing law exempts 16 categories of sales to which the
California bulk sales law would otherwise apply, including any
sale of assets that has a value of less than $10,000 or over
$5,000,000 as of the date of the bulk sale agreement. (U.
Com. Code Sec. 6103(c).)
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Existing law requires a buyer to a bulk sale transaction to do
the following upon determining that the California bulk sales
law applies to the transaction:
obtain from the seller a list of all business names and
addresses used by the seller within three years before the
date the list is sent or delivered to the buyer;
give notice of the bulk sale, as specified; and
comply with the specified section pertaining to sales
for consideration of $2 million or less and substantially
all in cash or an obligation of the buyer to pay the seller
cash in the future, or a combination thereof, if the bulk
sale is within the scope of that section. (U. Com. Code
Sec. 6104).
Existing law provides that the notice must:
state that a bulk sale is about to be made;
state the name and business address of the seller
together with any other business name and address listed by
the seller, as specified, and the name and business address
of the buyer;
state the location and general description of the
assets;
state the place and the anticipated date of the bulk
sale; and
state whether or not the bulk sale is subject to
provisions relating to sales of $2 million or less, as
specified, and, if so subject, state the matters required
under a specified provision. (U. Com. Code Sec. 6105(a).)
Existing law requires buyers at least 12 business days before
the bulk sale date to:
record the notice in the county recorder's office in the
county or counties where the assets are located and, if
different, in the county in which the seller is located;
publish the notice at least once in a newspaper of
general circulation published in the judicial district
where the assets are located and in the judicial district,
if different, in which the seller is located, as specified,
if in either case there is one, and if none, then in a
newspaper of general circulation in the county in which the
judicial district is located; and
provide the notice by registered or certified mail to
the county tax collector in the county or counties where
the assets are located. (U. Com. Code Sec. 6105(b).)
Existing law provides detailed procedures for bulk sales of $2
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million or less that are substantially all cash or an
obligation of the buyer to pay cash in the future to the
seller or a combination thereof. Within such transactions,
existing law provides specific procedures for disputed claims,
and claims involving escrow, including cases in which the cash
deposited or agreed to be deposited is not sufficient to cover
the claims filed with the escrow agent. (U. Com. Code Secs.
6106.2, 6106.4.)
Existing law includes specific procedures for bulk sales
involving auctions, and clarifies that the "buyer" is the
auctioneer or liquidator. (U. Com. Code Sec. 6108.)
Existing law provides that, subject to the good faith
exception and specified limitations, a buyer who fails to
comply with the above requirements is liable for damages in
the amount of the claim, reduced by any amount that the
claimant would not have realized if the buyer had complied.
(U. Com. Code Sec. 6107(a).)
Existing law provides that a buyer who can prove a good faith
and commercially reasonable effort to comply with specified
bulk sales law requirements, above, or to exclude the sale
from the application of the bulk sales law under one of the 16
exemptions, is not liable to creditors for failure to comply
with those requirements. (U. Com. Code Sec. 6107(c).)
Existing law provides that failure to comply with specified
requirements does not:
impair the buyer's rights in or title to the assets;
render the sale ineffective, void, or voidable;
entitle a creditor to more than a single satisfaction of
its claim; or
create liability other than as provided in this
division. (U. Com. Code Sec. 6107(h).)
Existing law provides that payment of the buyer's liability,
as specified, discharges to that extent the seller's debt to
the creditor. (U. Com. Code Sec. 6017(i).) Existing law
further grants the buyer, unless otherwise agreed, with an
immediate right of reimbursement from the seller for any
amount paid to a creditor in partial or total satisfaction of
the buyer's liability. (U. Com. Code Sec. 6107(j).)
Existing law provides for a one year statute of limitations,
as of the date of the bulk sale, except as provided. (U. Com.
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Code Sec. 6110.)
This bill would repeal the above-described provisions.
1.Existing law , the Commercial Code, lists the divisions
governing the rights of other purchasers of goods and lien
creditors, including bulk transfers (Division 6). (U. Com.
Code Sec. 2403.)
This bill would remove the reference to bulk transfers from
the above section.
2.Existing law , the Business and Professions Code's Fair
Practices of Equipment Manufacturers, Distributors,
Wholesalers, and Dealers Act (Dealers Act), contains reference
to and defines "bulk sales law." (Bus. & Prof. Code Sec.
22901(b).)
Existing law , the Dealers Act, specifies procedures by which a
supplier shall repurchase inventory whenever a dealer contract
is terminated by cancellation or nonrenewal and, in doing so,
clarifies that any repurchase shall not be subject to the
provisions of the bulk sales law or to the claims of any
secured or unsecured creditors of the supplier or any assignee
of the supplier until such time as the dealer has received
full payment or credit. (Bus. & Prof. Code Sec. 22905(m).)
Existing law , the Dealers Act, specifies procedures for
repurchase in the event of the death or incapacity of the
dealer, and specifically provides that any repurchase under
that section shall not be subject to the provisions of the
bulk sales law. (Bus. & Prof. Code Sec. 22924(b).)
Existing law , the Business and Professions Code's Alcoholic
Beverage Control Act (ABC Act), provides that it shall not be
a violation or grounds for disciplinary action for a licensee
selling alcoholic beverages to extend credit to or receive
payment from a holder of an interim operating permit unless
the seller has knowledge that the purchaser was operating
under an interim operating license, as shown by specified
evidence such as the holder having recorded or published
notice pursuant to the existing bulk sales law. (Bus. & Prof.
Code Sec. 24044.5(f).)
Existing law , the ABC Act, provides that it shall not be a
violation or grounds for disciplinary action for a licensee
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selling alcoholic beverages to extend credit to or receive
payment from a holder of a temporary permit unless the seller
has knowledge that the purchaser was operating under a
temporary permit, as shown by specified evidence such as the
holder having recorded or published notice pursuant to the
existing bulk sales law. (Bus. & Prof. Code Sec. 24045.5(d).)
This bill strikes all references to bulk sales and bulk sales
law in the above sections, and makes other non-substantive,
conforming changes.
3.Existing law provides that no right to attach order or writ of
attachment may be issued unless it appears from the facts
shown by affidavit that great or irreparable injury would
result to the plaintiff if issuance of the order were delayed
until the matter could be heard on notice. Existing law also
provides that this requirement may be satisfied by showing
that a bulk sales notice has been recorded and published
pursuant to the bulk sales law with respect to a bulk transfer
by the defendant. (Code Civ. Proc. Secs. 485.010(a),
485.010(b)(3).)
This bill removes the above provision relating to a bulk sales
notice as a satisfactory showing that great or irreparable
injury would result under that section.
4.Existing law , in relevant part, permits the tax collector to
seize any property which is assessed on the unsecured roll and
is advertised for sale pursuant to the bulk sales law. (Rev.
& Tax. Code Sec. 2953.1.)
This bill would remove the above reference to the bulk sales
law.
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COMMENT
1. Stated need for the bill
According to the author,
This bill repeals provisions in the UCC Article 6 ÝBulk
Sales], and eliminates references to Article 6 in statute.
ÝIn doing so, it] also conforms this practice to 47 other
states in the union, and its repeal would be in line with
recommendations made by the Uniform Law Commission.
Article 6 imposes a series of harsh punishments for a failure
to comply. A buyer that fails to comply with the notification
provisions is liable to creditors of the seller for damages
equal to the amount that the creditors would have been
entitled to receive had there been compliance, unless the
buyer can prove that it actually made good faith and
commercially reasonable efforts to comply. To comply with
Article 6, a buyer in bulk from a California merchant must
make as many as 40 determinations in order to accurately
assess whether Article 6 applies.
Today, Article 9 of the UCC allows a creditor to secure
creditor's claims with the merchandise and its proceeds, or
identifiable cash process in the case of junior inventory
secured parties, via an Article 9 security interest. Bulk
sales account only 1% of all transactions. Further, it has
become standard business practice for many buyers and sellers
in California knowingly not to comply with the California Bulk
Sales Law. This practice has developed because parties view
compliance with the California Bulk Sales Law as burdensome.
To address the risks, parties often negotiate specially
designed representations and warranties, indemnification
provisions, holdbacks, and set-offs.
2. Creditors' rights and their available remedies under
existing state and federal law
This bill would repeal the California bulk sale law which was
primarily directed at providing creditors with protections
against fraudulent acts of merchants by imposing requirements on
buyers and attaching liability for their noncompliance. This
raises the policy question of whether California should continue
to impose liability on buyers in these sales given the modern
circumstances described below.
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While the absence of other protections and remedies at law in
the late-19th and early-20th centuries made it such that the
benefits to creditors appeared to justify the costs of
interfering with good faith transactions and the unfairness of
imposing liability on buyers who otherwise had no relationship
to the seller's creditors, the circumstances have since
changed-both in terms of technologies and the law. First, given
changes in technology and the accessibility of credit reporting
services at little cost, creditors are more than adequately
equipped to make informed decisions about whether to extend
credit to a party, not to mention to physically track down the
absconding seller. Second, the legal void out of which the bulk
sales laws originally grew has since been filled with numerous
laws that afford creditors with greater opportunities to collect
their debts.
For example, California's long-arm statute extends jurisdiction
of its courts as broadly as the Constitution will allow. That
statute would permit an absconding seller who has had minimum
contacts with this state, upon reasonable notice of the action
against him or her, to be brought into a California court by a
creditor under available remedies at law. Under the Uniform
Fraudulent Transfer Act (UFTA), creditors also have remedies if
a bulk sale is fraudulent, not just where the transferee (buyer)
is in collusion with the seller, but also where the transferor
(seller) actively defrauded his creditor, or accepted less than
adequate consideration, as specified. (See Civ. Code Secs.
3439.94(a); 3439.05 for what constitutes a fraudulent transfer
under the UFTA.) Importantly, the protections contained in the
UFTA are much broader than those of the bulk sales law and, in
the event of a repeal of the bulk sales law, creditors would be
more than likely able to avail themselves of the UFTA remedies
when left without satisfaction of their debts by an absconding
seller.
Creditors also have protections under the Bankruptcy Code which
allows them to avoid any transfer of the debtor's property made
within two years before the date of the bankruptcy petition
where the debtor voluntarily or involuntarily engaged in actual
or constructive fraud, as defined. (See 11 U.S.C. Sec. 548; see
also UCC Committee Report pg. 10.) This body of law appears to
provide creditors both protections and equitable rights that
would also apply to certain bad-acting sellers in bulk sales.
(See 11 U.S.C. Secs. 544(a)(1)-(2); 547(b).) Division 9 of the
Commercial Code (California's version of UCC Article 9) also
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extends protections to creditors to the extent that it permits
them to secure the financing they provide to the merchant by
some or all of the merchant's assets. (See UCC Committee Report
pgs. 9-10.) Unlike with the bulk sales law, Division 9 gives
the creditor leverage to require that the merchant pay all
amounts owed before granting the release of any such security
interest and letting the sale move forth.
Thus, the evolution of laws in conjunction with the
considerations discussed under Comment 3(b) arguably diminish
the original justification for imposing the obligations and
costs, as well as the liability resulting from these laws, on a
bona fide buyer in bulk sales. As for those buyers in collusion
with the seller, there are and have always been laws to provide
creditors remedies against such collusion between the parties in
these sales. Furthermore, Committee staff notes that the intent
of the bulk sales laws was never to address bad-acting buyers,
but instead was to impose liability on all buyers to provide
creditors protection against and recourse for any harm that
results to them from the fleeing seller's wrongdoings. (See
Background for the law's original intent.)
3. California bulk sales law in practice
According to the proponents of this bill, the law that this bill
seeks to repeal has proven burdensome and costly, as was its
predecessor-factors that largely contributed to NCCUSL and ALI's
recommendation to repeal the law. While it may be important to
protect creditors under certain circumstances, a policy question
raised by this bill is whether the obligations imposed by the
bulk sale law continue to be necessary to protect creditors in
California.
a. Whether existing requirements imposed on buyers in bulk
sales remain appropriate
The obligation, costs, and any resulting liability of bulk
sales laws has been placed on buyers in bulk sales
transactions because of how those laws evolved. With the
modernization of both the legal landscape and available
technologies in the years since, the justification for
imposing such obligations on buyers in bulk is diminished and
is further undermined by the questionable benefits conferred
upon the creditors, as described in Comment 3(b), below.
Proponents argue that the issues relating to even the scope of
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the California bulk sales law are difficult for buyers to
ascertain in and of themselves. The UCC Committee Report
points to three main features of the law to exemplify this
point. First, to determine whether the sale is even subject
to the California bulk sale law, the buyer must establish,
among other things, whether the sale is outside the "ordinary
course of the seller's business" as defined by the bulk sale
law. Such an analysis, it concludes, involves both a factual
and legal assessment, at the end of which there may still be
no clear answer. Second, the buyer must determine if the sale
is for more than half of the seller's inventory and equipment.
The answer to this otherwise simple question can differ
greatly. Thirdly, the UCC Committee points to the sometimes
difficult issue surrounding whether the seller is a type of
seller that falls under the scope of the bulk sales law. Many
sellers, especially in today's market, are in more than one
line of business and, to determine what category of seller the
party is and whether the bulk sales law applies, the buyer may
need to conduct a thorough investigation of facts-an
investigation that often will rely primarily on receiving
accurate representations from the seller about his or her
business. (See UCC Committee Report, pg. 6.)
Similarly, Committee staff notes that while much of the
information that needs to be gathered and issues that need to
be addressed appear relatively simple, and may in fact prove
to be so in some cases, the ultimate assessments by the buyer
may rely at least in part, if not in whole, on the potentially
wrong-doing seller being honest with the buyer about
information that the seller controls.
b. Whether existing law's benefits to the creditor justify
the obligations imposed on buyers in bulk sales
The UCC Committee concluded in its report that the bulk sales
law ultimately does not afford valuable protections to
creditors, particularly given the other existing law
protections described in Comment 2. For example, while the
creditor does receive advance notice of a pending sale, and
may be able to take some action to protect itself (e.g.
ceasing any future advances of inventory or credit to the
seller), the bulk sale law does not provide him or her
assistance in collecting money already owed at the time he or
she receives notice of the pending sale. The bulk sales law
does not confer any special rights unless it is a sale of $2
million or less for substantially all cash or an obligation of
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the buyer to pay cash in the future, or a combination of both,
at which point the escrow features of the law apply. The
California Bulk sales law itself does not confer any right of
pre-sale attachment of the assets upon receiving notice, or a
right to injunction to stop the bulk sale. Thus, the UCC
Committee has concluded that "unless payment is being made
through escrow, an unpaid creditor's rights under the
California Bulk Sale Law are no different than the rights that
the creditor would have had without the California Bulk Sales
Law." (See UCC Committee Report, pg. 8.)
Moreover, some might argue that the benefit to creditors could
potentially be greater where the buyer does not comply with
the law because the liability of a buyer is contingent upon
whether the buyer applied the bulk sales act as necessary and
whether he complied with its requirements-not whether the
seller is solvent and pays his creditors for his debts. In
the event of noncompliance, in absence of a determination that
the buyer made a good faith and commercially reasonable
effort, the buyer is liable to the creditor for the amount of
the claim less anything he or she would not have received had
there been compliance. (U. Com. Code Sec. 6107(a).) To
illustrate, where the risk of a nonpaying seller is real,
assuming the buyer is insolvent or that the risk is actualized
and the seller does not settle his debts with the creditor,
the only way the creditor could potentially have benefitted
from the provisions of the bulk sales law is if there was
noncompliance on the part of the buyer. Where the buyer
complies, the creditor would receive notice under the bulk
sales law, but would find that the same law affords him or her
no tools to compel the seller to pay the debts. This suggests
that the benefits to creditors under the bulk sales law are
minimal at best, thereby making it difficult to justify the
imposition of extensive obligations on buyers, especially
where other laws would provide creditors with greater
protections.
Support : None Known
Opposition : None Known
HISTORY
Source : California Commission on Uniform State Laws
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Related Pending Legislation : None Known
Prior Legislation : AB 3653 (Chapter 1191, Statutes of 1990,
Harris) See Background.
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