Magazine article Business Credit

Proposed Revisions of Bulk Sales Law - A Help or Hindrance to Creditors?

Magazine article Business Credit

Proposed Revisions of Bulk Sales Law - A Help or Hindrance to Creditors?

Article excerpt

Recently, the National Conference of Commissioners on Uniform State Laws proposed revisions to the bulk sales law that will have a major impact on credit grantors. Certain of these changes increases the protection offered creditors while other provisions treat creditors less favorably.

Article 6 -- As It Stands Now

Article 6 of the Uniform Commercial Code (UCC) regulates bulk sales or other transfers. The statute was designed to address a fraud that was common around the turn of the century. A merchant would acquire his inventory on credit and then sell all of his goods and abscond with the proceeds. Who could the seller's creditors proceed against? The seller could not be located, or he or she had either dissipated or secreted the sales proceeds. The creditor could not recover the assets received by the buyer unless the transaction was fraudulent. Nor could the buyer be held responsible for the seller's debts unless the buyer agreed to assume them. The creditors of a bulk seller were thus left without a means of satisfying their claims. Article 6 was designed to minimize this risk.

Article 6 defines a bulk transfer as any transfer of a major part of the materials, supplies, merchandise, or other inventory by a company whose principal business is the sale of merchandise from stock. While the statute does not define what constitutes a "major part" of inventory, there is a general consensus that the term means more than one-half of the value of the seller's inventory. There is still a question about whether this determination requires considering all of the seller's inventory, regardless of location and timing of sale.

Article 6 imposes certain duties on the buyer in a bulk sale transaction. It requires that the buyer give advance notice of the sale and make certain information about the transfer available to the seller's creditors.

In any bulk sale regulated by Article 6, the buyer must obtain a list of the seller's existing creditors. This list must contain the names, addresses, and the amounts of the claims of the seller's creditors and must be signed and sworn to by the seller. The buyer must also obtain a list of the assets being sold by the seller. The buyer must then preserve both lists for six months after the transfer and permit any creditor to inspect and copy them. Some states permit the buyer to file these lists at a designated public office.

From the perspective of the buyer and the seller's creditors, the crucial part of Article 6 is the notice requirement. The buyer must give advance notice of the sale to all of the seller's creditors listed on the creditors' list, as well as to all other creditors of the seller known to the buyer. The notice must be given no later than ten days before the buyer takes possession of or pays for the goods and must be delivered by hand or by registered or certified mail.

The bulk sale notice must indicate:

* that a bulk transfer is about to occur;

* the names and addresses of the buyer and the seller;

* whether or not the seller's debts would be paid in full and, if so, the address to which creditors should send their claims;

* the location and general description of the propert sold;

* the address where the schedule of transferred assets and the list of creditors could be inspected;

* whether the transfer is to pay existing debts and if so, the amount of such debts and to whom owing; and,

* whether the transfer is for new consideration and, if so, the amount of such consideration and time and place of payment.

Many states have tax statutes that also require the buyer to give notice of a bulk sale to the state tax authorities. California goes so far as to require notice by newspaper publication.

Article 6, as it is presently in force in most states, imposes no duty on the buyer to distribute the proceeds of the bulk sale to the seller's creditors. However, 10 states have adopted provisions requiring distribution of sales proceeds to such creditors. …

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