NAVIGATING BULK SALES LAWS IN ASSET DEALS: ENSURING COMPLIANCE ACROSS JURISDICTIONS
Buying or selling a business by means of an asset purchase and sale that involves a State's "bulk sales law" requires businesses to navigate some unintuitive but important rules to protect their interests and remain legally compliant. Bulk sales laws vary from state to state, and understanding these differences is crucial for seamless, successful transactions without unpleasant surprises. In this blog post, we will explore the fundamentals of bulk sales laws, look at compliance considerations, and highlight the importance of understanding the general concept of a bulk sale. Note: while federal bankruptcy laws can be implicated by a bulk sale, this post is limited to state law requirements that may be implicated by a business transaction not involving the insolvency of the seller.
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First, What is Not a Bulk Sale?
A bulk sale, for purposes of Bulk Sales Laws, is not normal, day-to-day selling of large quantities of goods to customers by a business that is ordinarily involved in selling those goods. Also, a "fire sale" by a company that is going out of business, where the company sells goods to the general public (i.e., the company's normal consumer base) rather than to an acquiror who is taking over the business, should not trigger a state's bulk sales laws.
In fact, Bulk Sales Laws generally include a list of sales that are not bulk sales for purposes of the Bulk Sales Law. As discussed below, these can differ from state to state, but generally can be expected to include some or more of the following, even if they involve the transfer of goods which would otherwise be considered a bulk sale:
- a transfer made to secure performance of an obligation (e.g., to collateralize debt);
- a transfer of collateral to a secured party (e.g., to a lender in the case of a default);
- a sale made in the course of a bankruptcy proceeding;
- a sale to an unrelated buyer who assumes the debts of the seller before the bulk sale date (and satisfies certain related conditions);
- a transfer to a new entity specifically formed to take over the business of the seller and in that connection assumes the debts of the seller before the transfer (and satisfies certain related conditions);
- a sale of assets with a net value of either below a certain amount (e.g., $10,000, depending on the state) or over a certain amount (e.g., $25 million, depending on the state); and
- any other transfers that are specified in the applicable state law as being exempt from Bulk Sales Law requirements.
So, What Is a Bulk Sale?
In general, a so-called "bulk sale" refers to the sale or transfer of a significant portion of a business's assets outside the ordinary course of business. The legal phrase "bulk transfer" or "bulk sale" is often referred to in bulk sales statutes as "all or substantially all of a business' assets," although some states may specify a certain percentage. Unlike regular ("ordinary course") sales transactions, bulk sales involve a substantial transfer of assets that may impact the rights of the creditors of the selling business, as well as claims that tax authorities may have on the seller business. To protect the interests of creditors and state tax authorities, and to prevent fraudulent transfers, various states established bulk sales laws. Where applicable, these laws impose specific requirements on businesses engaging in such transactions.
Every state has its own definition of a "bulk sale" for purposes of triggering the so-called bulk-sales laws. For example, New York defines a bulk sale as "[t]he sale, transfer, or assignment of business assets, in whole or in part, by a person required to collect sales tax." New York further defines the term, business assets, as "any assets directly related to the conduct of a business, including: tangible personal property, real property, and intangible assets, such as goodwill."
California, on the other hand, defines it differently. In addition, California law distinguishes bulk sales that occur between private parties, and those that occur at an auction ... although for our purposes here the two are essentially the same: a sale (or series of sales) constitutes a bulks transfer if the sale is (i) "not in the ordinary course of the seller's business," (2) is of "more than half of the seller's inventory and equipment," (3) and that excess of one-half is "measured by value on the date of the bulk-sale agreement."
State Specific Rules
Though they generally have much in common, each state with bulk sales laws has its own requirements. While states have all but done away with their older statutory arrangements, some states retain remnants of those legacy laws. And although all states have adopted some version of the "Model UCC" (see below) imposing obligations on sellers and/or buyers, not all states have adopted all parts of it, and some states have additional requirements.
The takeaway here is the same: if you are planning to acquire or sell a business by means of an asset transfer, you first need to know whether that sale will implicate any bulk sales laws and ensure all applicable requirements are satisfied. Failure to comply can result in penalties, or in the buyer being forced to assume obligations of the seller beyond those obligations that were part of the negotiated deal.
Differences among various states' laws may include variations in notice requirements, waiting periods, publication requirements, escrow accounts, and exemptions. So, constituent businesses in an asset takeover must each know the specific bulk sales laws of the relevant state(s) implicated by the transaction.
Uniform Commercial Code (UCC)
Every state has adopted its own version of all or significant portions of the Model Uniform Commercial Code ("UCC"). The Model UCC is a comprehensive set of suggested laws governing commercial transactions developed by the American Law Institute and the National Conference of Commissioners on Uniform State Laws for states to consider adopting. Article 6 of the UCC pertains to bulk sales. Although it provides a consistent legal framework for commercial transactions across different jurisdictions, neither the Model UCC itself nor any of its distinct parts (e.g., Article 6) has the force of law unless (and then only to the extent) enacted by a state legislature.
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The Seller Is in Many States: Which UCC Applies?
Since bulk sales laws exist to protect the creditors of the seller in a bulk sale, and to secure the claims against the seller by tax authorities, the UCC of the seller's state applies, not that of the buyer. But, what if the seller is doing business in more than one state? Or if the seller is incorporated or formed in one state (e.g., Delaware) but with a headquarters or principal office in another (e.g., California or New York)? What if the seller does not even do business or have an assets in the state where the company was formed?
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So, Bulk Sales Law Applies. Now What?
Once it is determined that a bulk sales law applies to a particular transaction, there are several important steps that need to be followed to ensure compliance and protect the interests of all parties involved. Here are some key considerations.
Notice Requirements
Bulk sales laws commonly mandate that notice be given to certain persons before the sale or transfer of assets. States vary as to the party whose responsibility it is to file the required notice. For example, in California and New York, the buyer bears the legal responsibility to file the required notice. It is also important to know to when the notice must be given (i.e., how many days before the sale of the assets can happen -- 12 days in California, 10 days in New York); to whom the notice of bulk transfer must be given (in California this is particularly complicated); whether it must be recorded and if so where (also not simple in California); and whether it must be published in any newspapers.
Waiting Periods
Many states impose a waiting period between the notice to creditors and the completion of the sale. This waiting period allows creditors sufficient time to assert their claims and protect their interests. The duration of the waiting period can differ from state to state, and businesses must strictly adhere to the specified timeframe. For example, in New York, the bulk sales waiting period is 10 days. In California, it is 12 days.
Resolving Creditor Claims
Before any contemplated bulk sale can be finalized, the parties have to address any legitimate creditor claims. This may involve negotiating payment arrangements, satisfying the claims from the proceeds of the sale, or resolving disputes through legal means. Buyers typically bear the responsibility of verifying creditor claims during the waiting period. Buyers should conduct diligent searches and investigations to identify any outstanding commercial liens, tax liens, lawsuits, judgments, and/or potential creditors that may not have been previously identified.
Publication Requirements
Certain states may require the publication of a notice in a local newspaper to provide notice to potential creditors. The specific requirements for publication, including timing, duration, and content, may vary among jurisdictions. It is important for businesses to carefully assess whether publication is required in the relevant state and adhere to the specified guidelines if applicable.
Escrow Account Requirements
In some states, bulk sales laws may specifically require the use of an escrow account for certain types of transactions. These requirements aim to provide enhanced protection for both the seller and the buyer, as well as the creditors involved. When escrow account requirements apply, it is essential for businesses to understand and comply with the specific guidelines set forth by the relevant state or jurisdiction.
Consulting Legal Professionals
Given the complexity and variations in bulk sales laws, consulting with legal professionals specializing in business transactions is strongly recommended. An experienced attorney can provide tailored advice, guide businesses through compliance considerations specific to each jurisdiction, assist in drafting necessary documentation, and ensure adherence to applicable laws and regulations.
TAKEAWAY
Navigating bulk sales laws in asset deals requires a comprehensive understanding of the specific regulations in each jurisdiction involved. Compliance considerations, including research into state-specific laws, understanding notice requirements, adhering to waiting periods, verifying creditor claims, and potentially fulfilling publication requirements, are essential to successfully navigate the legal landscape. Businesses should consult legal professionals familiar with bulk sales laws in the relevant jurisdictions. By partnering with knowledgeable attorneys, businesses can ensure compliance, mitigate potential legal challenges, and maintain transparency and fairness in their commercial transactions across different states.
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A.I.
I have become very impressed with the efficiency possibilities of AI. So, I gave ChatGPT a try. I generated this text in part with GPT-3, OpenAI's large-scale language-generation model. After it generated its own draft language, I reviewed, edited, revised, and expanded on it to my own liking and to ensure accuracy in all material respects. WLF takes ultimate responsibility for the content of this article.
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