BILL ANALYSIS Ó
SB 12
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Date of Hearing: June 26, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 12 (Corbett) - As Amended: June 25, 2012
SENATE VOTE : 34-0
SUBJECT : BULK SALES
KEY ISSUE : IS CALIFORNIA'S CENTURY-OLD BULK SALES LAW STILL
NECESSARY TO PROTECT THE CREDITORS OF SELLERS IN BULK SALE
TRANSACTIONS, OR SHOULD IT BE REVISED AND RECAST TO HAVE MORE
NARROW APPLICATION AND TO PRESERVE SOME OF ITS MORE HELPFUL
FEATURES?
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 certain provisions of the Bulk Sales
Act, and revise and recast other sections to provide for a more
limited application of the remaining provisions. As recently
amended, the bill preserves significant notice and escrow
provisions from current law but limits their application to
distributors and wholesalers who are licensed either under the
Alcohol Beverage Control Act or the Cigarette and Tobacco
Products Licensing Act, where somewhat unique tax liabilities
and concerns about tax collection arguably justify a more
cautious approach towards repeal. Supporters contend that
current state and federal laws developed after the bulk sales
act was enacted now offer equal or better protections for
creditors who will no longer be subject to the bulk sales law.
The previous version of the bill was opposed by distributors,
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who have engaged in extensive discussions with the author to
address their concerns. The June 25 amendments are thought to
be sufficient to remove the distributors' opposition to the
bill, but this could not be confirmed at the time of this
analysis. It is also not known whether these amendments have
addressed the concerns expressed by other professional
associations who would be impacted by repeal of the bulk sales
act, including escrow professionals and newspaper publishers.
This bill is double-referred to the Assembly Revenue and
Taxation Committee.
SUMMARY : Repeals Division 6 of the Commercial Code (UCC-Bulk
Sales) and re-enacts selected provisions of the former law that,
as modified, shall apply only to transactions by certain
distributors licensed under alcohol and tobacco control laws.
Specifically, this bill :
1)Repeals in entirety Sections 6104, 6107, 6108, 6110, and 6111
of Division 6 of the Commercial Code (UCC-Bulk Sales).
2)Revises and recasts Sections 6101, 6102, 6103, 6105, 6106.2,
6106.4 of Division 6 as described in part below.
a) 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.
b) Defines "licensee" as a person licensed either as a
distributor or a wholesaler under the Alcohol Beverage
Control Act (Division 9 of the Business and Professions
Code), or licensed as a distributor or wholesaler under the
Cigarette and Tobacco Products Licensing Act (Chapter 3 of
Division 8.6 of the Business and Professions Code).
c) 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. Limits these
claims, as defined, to specified persons having a right to
payment from the seller, including taxing entities, secured
creditors, licensees (as defined above), and employees
having wage claims.
EXISTING LAW , Division 6 of the Commercial Code (also known as
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Uniform Commercial Code--Bulk Sales Act), governs bulk sales
transactions in the state. Among other things, the Bulk Sales
Act:
1)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. (Uniform Commercial Code Sec. 6103(a). All other
references are to this code unless otherwise stated.)
2)Exempts 16 categories of sales to which the Act 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. (Section 6103(c).)
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
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)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 : According to the author, California's bulk sales law
has largely outlived its usefulness for many creditors for whom
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it was intended to protect, particularly in light of more modern
legal protections for creditors since enacted at the state and
federal levels. This bill seeks to repeal certain provisions of
the Bulk Sales Act, and revise and recast the remaining
provisions that, as modified, would continue to apply primarily
to distributors licensed under existing alcohol and tobacco
control laws.
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 contend that the bulk sales law
should be repealed in its entirety, stating: "UCC Article 6 (the
Bulk Sales Act) is obsolete. It has been superseded by other
laws that offer better protection of creditors. (Repeal) would
clean up our codes and bring California law into conformity with
the Uniform Commercial Code throughout the country."
Since the National Conference of Commissioners on Uniform State
Laws (NCCUSL) and the American Law Institute's (ALI) 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.
In 1989, recognizing that some states would be disinclined to
repeal the law altogether, 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. At that time, California declined to
repeal its bulk sales law and instead elected 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, California's
bulk sales law differs from the 1989 revised UCC Article 6 in
significant aspects. For example, the California 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
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distribution. (CEB California UCC Sales and Leases, Secs.
14.42-14.47.)
As amended, this bill preserves significant notice and escrow
provisions from the Bulk Sales Act with limited application to
certain licensed distributors. This bill continues to repeal
the UCC-Bulk Sales Act in its entirety, but in order to address
concerns raised by opponents, the author has amended the bill to
restore selected sections of the bulk sales law in a modified
form. Because virtually all the states have already repealed
UCC Article 6 and existing California bulk sales law already
differs from the UCC model, this bill will not eliminate
uniformity in law with other states with respect to bulk sales.
Under this bill, California will join the majority of states
that no longer broadly requires all merchants to comply with
rules and procedures that, according to proponents, are now
outdated and unnecessary as evidenced by their widespread
repeal.
The California Beer and Beverage Distributors (CBBD) opposed the
previous version of this bill because it believed that complete
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 they supply. CBBD noted
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, the distributors
noted 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,
opposed the previous version of the bill 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." Together, the distributors stated that they rely
heavily on the protections of escrow and notice under the
current bulk sales law.
As amended on June 25, the bill preserves significant notice and
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escrow provisions from current law but limits their application
to distributors and wholesalers who are licensed either under
the Alcohol Beverage Control Act or the Cigarette and Tobacco
Products Licensing Act. By its own terms, this bill would apply
to a much narrower set of bulk sale transactions than under
current law, and primarily in the sector of alcohol and tobacco
suppliers and retailers, where somewhat unique tax liabilities
and concerns about tax collection arguably justify a more
cautious approach towards repeal.
Significantly scaling back the reach of the current bulk sales
law will reduce obligations upon buyers that are not justified
by the limited protections it offers to creditors. Proponents
of the bill contend that, on balance, the bulk sale law's
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
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 current bulk sales law holds him to near strict
liability to creditors for any mistaken determination that could
constitute failure to comply. As amended, this bill would
alleviate for many California merchants the burden of making the
correct applicability determination, as well as publication and
notice requirements that apply if the current bulk sales law
applies. The bill would also repeal the associated liability
provisions for cases of non-compliance with the current act.
According to supporters of repeal, even if the buyer has
complied with the current 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
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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.
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. For example, they
contend that under Article 9 of the UCC, suppliers can alert
prospective bulk-sale buyers of their claims against the
bulk-sale assets by recording a security interest with the
California Secretary of State. Potential buyers can check the
Secretary of State's Article 9 records, which are publicly
searchable on the Internet, and if there are any active claims
against the seller's assets, protect themselves 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."
According to proponents, current federal bankruptcy law also
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
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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) and 547(b).)
Finally, proponents contend that in sales 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).) According to the authors, the protections
contained in the UFTA are much broader than those of the bulk
sales law and will protect those creditors to whom the bulk
sales act would no longer reach if this bill were to become law.
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."
In response to the opponents' concerns, the author has amended
the bill to retain the non-judicial and escrow provisions to
apply to certain licensed distributors, primarily of alcohol and
tobacco products. In any case, proponents report 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.)
Recent amendments potentially address concerns of some, but not
all, of those who opposed the previous version of the bill . The
previous version of the bill was opposed by the California Beer
and Beverage Distributors and the California Distributors
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Association, who engaged in extensive discussions with the
author about possible amendments. The June 25 amendments are
thought to be sufficient to remove the distributors' opposition
to the bill, but this could not be confirmed at the time of this
analysis.
The previous version of the bill was 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,
distributors, and other sellers, buyers, and creditors. For
example, the California Escrow Association, the Escrow Institute
of California, and the California Land Title Association are all
escrow holders who provide services to sellers, buyers, and
creditors that would be lost upon complete repeal of the bulk
sales law. At the time of this analysis, it could not be
verified that these associations continue to oppose the bill.
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. While the bill continues to provide for newspaper
publication of bulk sale notices, the scope of the bill is far
narrower than before. It is also unknown at the time of this
analysis whether CNPA remains in opposition to the bill.
REGISTERED SUPPORT / OPPOSITION :
Support
California Commission on Uniform State Laws (sponsor)
Opposition (to the previous version of the bill)
California Beer and Beverage Distributors (CBBD)
California Distributors Association (CDA)
California Escrow Association and several of its individual
members
California Land Title Association
California Newspaper Publishers Association (CNPA)
Credit Management Association
Escrow Institute of California
First Corporate Solutions
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Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334