Bulk Sales Transfers-Protection for Creditors
Lee, Scott W., Business Credit
THE LAW GENERALLY ALLOWS A PERSON to dispose of property as he or she sees fit. Early in U.S. history, the courts stated that an individual has absolute power over his or her property to make any disposition that does not interfere with the rights of others. (Sexton v. Wheaton, 8 Wheat., US, 229). The trailer, "does not interfere with the rights of others" stems from the early recognition that a person does not have the right to convey his property in such a manner that would work a fraud on his creditors.
The English codified this principle in the 1500s, in the statute of 13 Elizabeth. I won't walk you through the whole history, but it is important to note that there is a long history of common law dealings with fraudulent conveyances that attempts to provide a remedy for creditors. In 1918, the National Conference of Commissioners on Uniform State Laws approved a Uniform Fraudulent Conveyance Act. And, some states have adopted a more specific "bulk sales" act that deals with certain types of fraudulent conveyances. The importance of the history lesson is that you may have other remedies available, even though your state may not have adopted some type of regulation of bulk sale transfers.
Elements of Fraudulent Conveyance
The general elements in determining the character of a conveyance as fraudulent are the intention of the parties, the financial condition of the transferor, the consideration (or lack thereof) given for the transfer, and the relationship of transferor and transferee. The first element-intent-is hard (if not impossible) to know, unless the transferor confesses his sins. You may have better luck with confessions than most of us; generally, we look for such badges of fraud as transfers in anticipation of litigation, secret transfers or failures to record the transaction.
A bulk sale transfer act provides some of these "badges of fraud" and states that the debtor, suddenly disposing of an unusually large portion of stock in trade to one person/entity, is prime evidence of a fraudulent conveyance. The burden will then be on the transferee and/or transferor to prove otherwise. So, you may say that a bulk sale transfer act shifts the burden of proof, which ultimately makes it easier for the creditor to reach that debtor's assets, even though someone else now holds them. Someone else, in essence, becomes a "trustee for the benefit of creditors".
Caution: You Need an Attorney
A caveat is important here. What does or does not fall within the range of a Bulk Sale Transfer Act is not always clear. I will provide you with some guidance, so you might be alert to the situation. Nevertheless, generally you should work with an attorney to move this claim through litigation. The knowledge you have gained through prior dealings with the debtor will be invaluable to your attorney. The information that follows about transactions, property and businesses that might be covered, is taken largely from the Uniform Commercial Code-Bulk Sales, and the annotations and comments thereto. Your state's code may vary from the Uniform Code.
* Transactions. A "bulk sale or transfer" is one that involves a major portion of the materials, supplies, merchandise or inventory of the enterprise. It is important to note that the word "transfer" is included. The transaction can be other than a sale of the goods. (Hull v. Minkler, 319 P.2d 815, Wash. 1958) And it does not have to be a sale of the entire stock of goods or merchandise (AJ. Long Cigar & Grocery Co. v. Harvey, 125 S.E. 870, GA 1924), but rather is of such nature as to be outside the usual or regular course of the debtor's business. (Waterman v. Perrotta, 355 P.2d 313, Col. 1960)
Many transactions, such as those made to give security for the performance of an obligation, sales by executors, sales pursuant to court order and transfer of property that is exempt from execution, are excepted under the UCC-so is a general assignment for the benefit of creditors. …