BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



           ------------------------------------------------------------ 
          |SENATE RULES COMMITTEE            |                    SB 12|
          |Office of Senate Floor Analyses   |                         |
          |1020 N Street, Suite 524          |                         |
          |(916) 651-1520         Fax: (916) |                         |
          |327-4478                          |                         |
           ------------------------------------------------------------ 
           
                                         
                                 THIRD READING


          Bill No:  SB 12
          Author:   Corbett (D)
          Amended:  1/4/12
          Vote:     21

           
           SENATE JUDICIARY COMMITTEE  :  5-0, 1/10/12
          AYES:  Evans, Harman, Blakeslee, Corbett, Leno


           SUBJECT  :    Uniform Commercial Code:  Bulk Sales

           SOURCE  :     California Commission on Uniform State Laws


           DIGEST  :    This bill repeals Californias bulk sales law in 
          its entirety, removes any references to bulk sales 
          throughout other code sections, and makes other conforming, 
          non-substantive changes.  

           ANALYSIS  :    Existing law, the Uniform Commercial Code 
          (UCC) - Bulk Sales (California bulk sales law) governs bulk 
          sales transactions in the state.  (UCC Sections 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

                                                           CONTINUED





                                                                 SB 12
                                                                Page 
          2

           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.  (UCC Section6102(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.  (UCC Section 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 United States, the 
            seller's major executive U.S. office is in this state.  
            (UCC Section 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.  
          (UCC Section 6103(c))

          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 







                                                                 SB 12
                                                                Page 
          3

            sale is within the scope of that section.  (UCC Section 
            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.  (UCC Section 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.  (UCC Section 6105(b))

          Existing law provides detailed procedures for bulk sales of 
          $2 million or less that are substantially all cash or an 







                                                                 SB 12
                                                                Page 
          4

          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. 
           (UCC Sections 6106.2, 6106.4)

          Existing law includes specific procedures for bulk sales 
          involving auctions, and clarifies that the "buyer" is the 
          auctioneer or liquidator.  (UCC Section 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. 
           (UCC Section 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.  (UCC Section 
          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. 
             (UCC Section 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.  (UCC Section 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.  (UCC Section 







                                                                 SB 12
                                                                Page 
          5

          6107(j))

          Existing law provides for a one year statute of 
          limitations, as of the date of the bulk sale, except as 
          provided.  (UCC Section 6110)

          This bill repeals the above-described provisions.

          Existing law, the Commercial Code, lists the divisions 
          governing the rights of other purchasers of goods and lien 
          creditors, including bulk transfers (Division 6).  (UCC 
          Section 2403)  

          This bill removes the reference to bulk transfers from the 
          above section.  

          Existing law, the Business and Professions Code's (BPC) 
          Fair Practices of Equipment Manufacturers, Distributors, 
          Wholesalers, and Dealers Act (Dealers Act), contains 
          reference to and defines "bulk sales law."  (BPC Section 
          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.  (BPC 
          Section 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.  (BPC Section 22924(b))

          Existing law, the BPC'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 







                                                                 SB 12
                                                                Page 
          6

          operating license, as shown by specified evidence such as 
          the holder having recorded or published notice pursuant to 
          the existing bulk sales law.  (BPC Section 24044.5(f))

          Existing law, the 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 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.  (BPC 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. 

          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 of 
          Civil Procedure Sections 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. 

          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.  (Revenue and Taxation Code Section 2953.1)

          This bill removes the above reference to the bulk sales 
          law.

           Background
           
          In the late-19th century, territories across the U.S. 
          experienced a need for laws that would protect creditors 







                                                                 SB 12
                                                                Page 
          7

          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 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 UCC Article 6 (1989 Official 
          Text), Prefatory Note, page 4 
           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 







                                                                 SB 12
                                                                Page 
          8

          is in California.  (See UCC Sections 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, 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, pages 4, 6 
           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.  







                                                                 SB 12
                                                                Page 
          9

          (Witkin, Sum. Cal. Law (10th Ed. 2010) Sales, Section 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, Sections 
          14.42-14.47)   

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No   
          Local:  No

           SUPPORT  :   (Verified  1/10/12)

          California Commission on Uniform State Laws (source)

           ARGUMENTS IN SUPPORT  :    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 







                                                                 SB 12
                                                                Page 
          10

            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."


          JJA:kc  1/12/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

                                ****  END  ****