BILL ANALYSIS Ó
SB 12
Page 1
Date of Hearing: June 19, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 12 (Corbett) - As Amended: May 3, 2012
SENATE VOTE : 34-0
SUBJECT : BULK SALES
KEY ISSUE : IS CALIFORNIA'S CENTURY-OLD BULK SALES ACT STILL AN
ESSENTIAL AND EFFECTIVE MEANS OF PROTECTING THE CREDITORS OF
SELLERS IN BULK SALE TRANSACTIONS, OR SHOULD CALIFORNIA FOLLOW
THE RECOMMENDATION OF THE UNIFORM LAW COMMISSION AND JOIN THE
OTHER 49 STATES THAT HAVE ALREADY REPEALED THEIR BULK SALES
ACTS?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
A "bulk sale" is a sale to a buyer of more than half the
seller's inventory and equipment that is not done in the
ordinary course of the seller's business. Bulk sales laws were
enacted by the states over 100 years ago first and foremost to
protect creditors-more specifically, to reduce the prospect that
the owner of a business will sell all or most of the business's
assets and then disappear with the money, leaving his creditors
unpaid. The central feature of bulk sales laws is a requirement
that creditors be given notice of any transaction that qualifies
as a bulk sale, with the buyer being liable to the seller's
creditors to pay the seller's debts if the buyer doesn't ensure
that the transaction strictly complies with the law.
This bill seeks to repeal the California Bulk Sales Act in its
entirety. According to the author, California's bulk sales law
has outlived its usefulness, no longer effectively serves its
purpose to protect creditors, and thus deserves to be repealed.
Supporters of repeal also contend that current state and federal
laws developed after the bulk sales act was enacted now offer
equal or better protections for creditors. Opponents of the
bill argue generally that repealing the bulk sales law will
deprive creditors of adequate notice of sales and weaken their
ability to collect debts from the seller of a business. Some
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professional distributors (companies that supply inventory to
retailers) oppose the bill from the position of creditors who
report that the current bulk sales law is working just fine for
them and who see no demonstrated reason that warrants its
repeal. Newspaper publishers and professional escrow holders,
whose business would also be impacted by repeal of the law,
understandably oppose the bill. They contend, among other
things, that the predictability of the current procedural
framework that they help support will lessen uncertainty among
business, not grow it, which in turn will help economic recovery
in the state. This bill was passed by the Senate without any
"No" votes, and is double-referred to Assembly Revenue and
Taxation Committee.
SUMMARY : Repeals the California Bulk Sales Act in its entirety,
removes corresponding cross-references to bulk sales, and makes
other technical and conforming changes to the codes.
EXISTING LAW , Division 6 of the California Commercial Code
(commencing with Section 6101), also known as the Article 6 of
the Uniform Commercial Code (Bulk Sales Act), governs bulk sales
transactions in the state. Among other things, the Bulk Sales
Act:
1)Defines "bulk sale" 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, unless certain exceptions apply.
(Uniform Commercial Code Sec. 6102(a)(3). All other
references are to this code unless otherwise stated.)
2)Applies to bulk sales transactions, except as otherwise
provided, if (1) 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 (2) on the date
of the bulk sale agreement, the seller is located in this
state, or if not, the seller's executive office is in this
state. (Section 6103(a).)
3)Requires a buyer to an applicable bulk sale transaction to
provide a notice of the bulk sale that specifies, among other
things: (a) the name and business address of both the seller
and the buyer; (b) the location and general description of the
assets; (c) the place and the anticipated date of the bulk
sale; and (d) whether or not the bulk sale is subject to
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provisions relating to sales of $2 million or less, as
specified. (Section 6105(a).)
4)Requires buyers, at least 12 business days before the bulk
sale date, to (a) record the notice in the county recorder's
office where the assets are located and, if different, in the
county in which the seller is located, and (b) to publish the
notice at least once in a newspaper of general circulation
published in the judicial district where the assets are
located or, if different, in the judicial district, in which
the seller is located. (Section 6105(b).)
5)Establishes detailed procedures for bulk sales of $2 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. Further specifies 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 claims filed with the escrow agent.
(Sections 6106.2 and 6106.4.)
6)Provides that a buyer who fails to comply with provisions of
the Bulk Sales Act 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, subject to the good faith
exception and other specified limitations. (Section 6107,
subd. (a) and (c).)
COMMENTS : This bill seeks to repeal the California Bulk Sales
Act in its entirety. According to the author, California's bulk
sales law has outlived its usefulness, no longer effectively
serves its purpose to protect creditors, and thus deserves to be
repealed.
Modern trend among states to repeal the Bulk Sales Act,
California being one of the last exceptions. This bill is
sponsored by the California Commission on Uniform State Laws
("Uniform Law Commission"), who echo the author's call for
repeal of the bulk sales law, stating: "UCC Article 6 (the Bulk
Sales Act) is obsolete. It has been superseded by other laws
that offer better protection of creditors. Enactment of SB 12
would clean up our codes and bring California law into
conformity with the Uniform Commercial Code throughout the
country."
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Since the National Conference of Commissioners on Uniform State
laws (NCCUSL) and the American Law Institute's landmark 1989
study recommending repeal of bulk sales laws, all 49 other
states have repealed their bulk sales laws, leaving California
and the District of Columbia as the last two remaining
jurisdictions to retain it. At the state level, the Uniform Law
Commission and the UCC Committee of the Business Law Section of
the State Bar (UCCC) have both officially renewed their calls to
repeal the bulk sales law in California.
Original justification for the Bulk Sales Act. According to the
UCCC, bulk sales laws were originally enacted at the end of the
19th century to protect certain creditors from merchants who
operated retail shops, acquired inventory on credit and later
sold a substantial part of their merchandise in bulk and
absconded with the proceeds without paying their creditors. At
that time, creditors were often unable to find (let alone
successfully obtain jurisdiction over) a fleeing merchant to
collect the merchant's debts to the creditors. To make matters
worse, there was no national bankruptcy law, each state had its
own insolvency laws, and fraudulent conveyance laws only
afforded protections to the creditor if there was collusion
between the seller and buyer. ("Report of the UCC Committee
Recommending Repeal of Division 6", Sept. 27, 2011.)
In response, bulk sales laws were developed to ensure that a
merchant's creditors were given notice that a bulk sale is
taking place to afford them an opportunity to satisfy their
claims before the merchant could sell his assets to a buyer and
disappear with the proceeds of the sale without ever paying back
his creditors. (See 4 Witkin, Sum. Cal. Law (10th Ed. 2010)
Sales, Sec. 219.)
Does the bulk sales act still confer any essential protections
to creditors that justify the obligations it places on buyers?
Proponents of the bill contend that, on balance, the bulk sale's
laws purported benefits to creditors do not appear to justify
the obligations it imposes on buyers. According to the author,
these obligations are unnecessarily burdensome and difficult to
comply with, yet yield very little in meaningful protection for
creditors that might make them otherwise worthwhile. For
example, a buyer in bulk from a California merchant may have to
make as many as 40 determinations in order to accurately assess
whether the bulk sales law even applies, a number of which
depend primarily on receiving accurate representations from the
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seller about his or her business (e.g. whether the sale is
outside the "ordinary course of the seller's business" or
whether the seller may qualify as exempt from the bulk sales
law.) (UCCC Report, pg. 6.) Many of these determinations
require the buyer to complete a detailed factual and legal
analysis that may not yield certainty. Unfortunately for the
buyer, the bulk sales law holds him to near strict liability to
creditors for any mistaken determination that could constitute
failure to comply.
According to supporters of repeal, even if the buyer has
complied with the bulk sales law and the creditor receives
proper notice, the creditor would then find that the same law
affords him no tools to compel the seller to pay the debt. For
example, while the creditor upon notice may be able to take
preventive action (e.g. ceasing any future advances of inventory
or credit to the seller), the bulk sale law does not assist the
creditor 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 the buyer
to pay cash in the future, or a combination of both, at which
point the escrow features of the law apply. The 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. For these reasons, 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. Furthermore, they
conclude that the bulk sales law ultimately does not afford
valuable protections to creditors, especially where other laws
now provide creditors with greater protections (discussed
below.)
Existing state and federal laws developed after the bulk sales
act was enacted now offer equal or better protections for
creditors. According to the author, creditors now have
additional tools and legal options to sufficiently protect their
interests if the bulk sales law is repealed, including Article 9
of the UCC, the Uniform Fraudulent Transfer Act, the federal
bankruptcy code, and other advancements in technology and
practice.
A. Article 9 of the UCC: Proponents contend that Division 9 of
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the California Commercial Code (Article 9 of the UCC) provides
an efficient way for a supplier to ensure that the financing
provided to the merchant will be secured by some or all of the
assets of the merchant.
Under UCC Article 9, creditors can alert prospective bulk-sale
buyers of the creditors' claims against the bulk-sale assets by
simply including a "granting clause" in the contract, followed
by recording a security interest with the California Secretary
of State. Filing the UCC-1 financing statement form is short
and easy to complete and serves to perfect the security
interest.
If a supplier obtains a security agreement and files a UCC-1
financing statement, several
benefits will result. First, when the supplier files the
financing statement, the world is effectively informed that the
supplier is a creditor that has a security interest in certain
assets of the merchant. According to the author, it is standard
practice for bulk-sale buyers to first check the Secretary of
State's Article 9 records (publicly searchable on the Internet)
to see whether any creditors have active claims against the
seller's assets. If so, then the potential buyer can protect
himself by insisting that the seller obtain a release of the
security interest from the supplier in order for the buyer to
agree to go forward with the sale. This enables the supplier to
require that the merchant pay all amounts owing to the supplier
in full, prior to the release of the security interest. For this
reason, the UCC Committee concluded that this right "is far
superior to any benefits conferred to a supplier by the
California Bulk Sales Law."
In the case of some other future creditor, when he or she
discovers the supplier's security interest covering assets of
the merchant, the future creditor may analyze the merchant's
creditworthiness a little harder, may decide to extend credit to
the merchant in a lower amount or not at all, or may ask the
supplier to subordinate its security interest to the security
interest to be created in favor of the future creditor. In any
of those situations, however, the potential buyer and the future
creditor will have to engage with the supplier, and consequently
the supplier will be in a better position to actively protect
its interests than is derived from the California Bulk Sales
Law.
B. Fraudulent Transfer Act : Proponents contend that in sales
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where there is actual or constructive fraud, the Uniform
Fraudulent Transfer Act (UFTA) (Civil Code Sec. 3439 et seq.)
provides sufficient remedies to creditors and lessens the need
for the Bulk Sales law.
Under the 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).) 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. Because California's long-arm statute extends
jurisdiction of its courts as broadly as the Constitution will
allow, that statute would enable a creditor to bring an
absconding seller into a California court as long as basic
minimum contacts and notice requirements are met.
In response, opponents contend that creditors are better served
by the non-judicial and escrow processes provided by the bulk
sales act than by having to go to court to litigate relief
pursuant to the UFTA. For example, the California Newspaper
Publishers Association states "It is unclear, other than by way
of post-transfer litigation, how a creditor would be able to
enforce his or her rights in the wake of any repeal of the bulk
sales law. Without a reasonable method to identify and pay the
claims against the seller's business, a creditor's only
post-sale remedy would be limited to an action brought in our
already over-burdened courts."
C. U.S. Bankruptcy Code. According to proponents, current
federal bankruptcy law affords many protections to creditors of
a bankrupt seller, including permitting a bankruptcy trustee to
avoid any transfer of the debtor's property made within two
years before the date of the bankruptcy petition where the
debtor engaged in fraud, as specified. (11 U.S.C. 548.) Other
bankruptcy protections, discussion of which is outside the scope
of this analysis, are also available and appear to help protect
creditors from bad-acting sellers in bulk sales. (See, e.g., 11
U.S.C. Sections 544(a)(1)-(2) and 547(b).)
ARGUMENTS IN OPPOSITION : The California Beer and Beverage
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Distributors (CBBD) opposes the bill because it believes that
repeal of the bulk sales law would jeopardize the ability of its
member distributors to secure their claims for accounts
receivable from alcohol retailers that it supplies. CBBD notes
that, with respect to distributors of alcohol products who are
also regulated by the Alcoholic Beverage Control Act, existing
law requires them to extend 30 days or more of credit to retail
licensees that inventory alcoholic beverages for resale,
generating accounts receivable that can range into the thousands
or tens of thousands of dollars. In addition, CBBD notes that
unlike some products, both alcohol and tobacco products have
excise taxes that must be paid prior to retail, leaving the
distributor liable for those taxes if the seller absconds
without paying.
The California Distributors Association (CDA), representing
distributors of grocery, alcohol, and tobacco products to the
convenience store industry, opposes for similar reasons, stating
that "This bill would potentially be putting our businesses in
jeopardy of losing alcohol, tobacco, and in some cases, sales
tax revenue that we collect on behalf of the state."
The bill is also opposed by other professional associations who
would be impacted by repeal of the bulk sales act, but whose
interests are somewhat different from the primary liability
issues of direct concern to retailers and distributors, and
other sellers, buyers, and creditors.
The California Newspapers Publishers Association (CNPA) contends
that newspaper publication of bulk sales notices enable
creditors to protect themselves and is a proven standard of
notice. In response, the author contends that the
well-established system of persistent notice in official
government records pursuant to UCC Article 9 "provides far
better protection for creditors than forcing them to regularly
check newspaper ads to see if any of their debtors happen to
have published a bulk-sales notice."
The California Escrow Association and the Escrow Institute of
California also oppose this bill. These escrow holders provide
services to sellers, buyers, and creditors that would be lost
upon repeal of the bulk sales law. The California Escrow
Association writes: "We suggest the predictable processes and
outcomes that resolve uncertainty rather than increase
litigation are preferred where possible, and that retaining the
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bulk sales law encourages rather than hinders California's
economic recovery by maintaining statutory and predictable
processes."
In response, the author notes that the UCC Committee reported
finding no evidence in states that have repealed their bulk
sales laws indicating that creditors are refusing to extend
credit, the cost of credit has increased, or that creditors are
suffering increased losses as a result of the repeal of the bulk
sales law in those states. (UCCC Report, pg. 12.)
REGISTERED SUPPORT / OPPOSITION :
Support
California Commission on Uniform State Laws (sponsor)
Opposition
California Beer and Beverage Distributors (CBBD)
California Distributors Association (CDA)
California Escrow Association
California Land Title Association
California Newspaper Publishers Association (CNPA)
Escrow Institute of California
First Corporate Solutions
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334