Bulk Sales Law

Background

The sale of a business enterprise creates an opportunity for the seller of the business to collect the purchase price without paying creditors and suppliers. To prevent this problem, states enacted "bulk sales" laws. Nearly all states have now adopted a uniform set of laws governing these transactions, contained in Article 6 of the Uniform Commercial Code.

Requirements

Article 6 covers any "bulk transfer," defined as a transfer in bulk and not in the ordinary course of business of a major part of the materials, supplies, merchandise or other inventory of the business. If a bulk transfer is made, it has no effect against any creditor of the business unless the seller has complied with the obligations of Article 6, including furnishing a list of existing creditors to the buyer. The buyer must maintain the list of creditors for six months. Notice must be given to each creditor on the list at least ten days before the purchase of the business. That notice must specify whether all the debts of the seller are to be paid in full as they become due as a result of the transaction. If the debts of the seller are not to be paid in full, then the notice must include other information about the location and description of the property to be sold, creditor information and other aspects of the sale.

The benefit of the bulk sale provisions of the Uniform Commercial Code is to give creditors the opportunity to make a claim against the seller's property that is being sold. If they choose not to do so, they may have no further claims against the property that is sold to the buyer. If a bulk transfer is made without complying with Article 6, the buyer of the business may find that he or she is subject to claims of creditors arising before the date of the purchase of the business.

Considerations

Article 6 has been subject to considerable criticism. The law imposes costs on buyers to protect the seller's creditors, with whom they have no relationship, and sometimes makes good faith buyers responsible for debts without any notice of wrongdoing by the seller.

In 1988, the National Conference of Commissioners on Uniform State Laws (NCCUSL) responded to the criticism with proposed changes to Article 6. The NCCUSL suggested two alternatives: 1. Repeal Article 6 completely; or 2. Revise Article 6 to impose fewer burdens on buyers while still protecting creditors. As of June, 1995, Arizona, California, Hawaii, Oklahoma and Utah have enacted the revised Article 6. The following states have completely repealed Article 6: Alaska, Arkansas, Colorado, Connecticut, Florida, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Dakota, Oregon, Pennsylvania, South Dakota, Texas, Washington, West Virginia, and Wyoming.

Buyers must remain cautious in those states where Article 6 has been repealed. Other statutes may establish some liability to the seller's creditors. Also, court decisions have found buyers to be liable when there is no notice of the sale and it appears to the general public that the seller still owns the business.

If you are buying or selling a business, consult with your attorney to make sure that you are complying with all the provisions of the bulk sale law requirements. Buyers in particular should make sure the purchase of the business is completed according to the bulk sales rules in Article 6 or other applicable laws. Otherwise, a buyer risks the obligation of paying off the seller's old creditors.

If you are a trade creditor or supplier and receive a bulk sales notice about your customer, pay careful attention. In most states, you must act quickly to preserve your claim against the transferred goods and collect from the amounts to be paid to the seller of the business. Failure to exercise your rights in a timely fashion may limit your ability to collect amounts owed.

For related information see:

Uniform Commercial Code (UCC)