ULC

UCC Article 6, Bulk Sales (1989) Summary

Article 6 of the Uniform Commercial Code (UCC) provides a specific kind of protection for creditors of businesses that sell merchandise from stock.  Creditors of these business are vulnerable to a "bulk sale,@ in which the business sells all or a large part of inventory to a single buyer outside the ordinary course of business, following which the proprietor absconds with the proceeds.  Original Article 6 of the UCC requires "bulk sale" buyers to provide notice to the seller's creditors and to maintain a list of seller's creditors and a schedule of property obtained in a "bulk sale,@ for six months after the "bulk sale" takes place.  Unless these procedures are followed, creditors may void the sale.  Auctioneers, who handle merchandise in bulk, are given a similar burden to that of "bulk sale" buyers. 

 

Article 6 replaced a variety of earlier bulk sales laws in the states.  All were enacted in a climate of smaller businesses that were localized in scope.  These laws protected local business creditors from liquidations that might take merchandise and proceeds beyond these creditors' ability to obtain a remedy.  Article 6 introduced the salubrious quality of uniformity to these protections for creditors.

 

But the credit environment has changed, so that the risk of the absconding merchandiser is no longer very great.  Business creditors can evaluate creditworthiness far better than was the case when the UCC was first promulgated, and they can pursue absconding sellers with much less difficulty.  Further, modern fraudulent transfer actions under the Uniform Fraudulent Transfer Act overlap Article 6 in a significant way.  Sophisticated and widespread inventory financing under Article 9 of the UCC, which provides even more significant protections for creditors, simply bypasses Article 6 protections.  In 1988, as revisions of Article 6 were being considered, a considerable body of opinion supported the notion of repeal for Article 6.  That body of opinion perceived that the balance of equities had swung from essential protection for creditors to unnecessary burdens for "bulk sale" buyers. 

 

It was not clear, however, that repeal was or is a uniform solution or a uniformly acceptable recommendation in every state and jurisdiction.  So the Revised Article 6 of the UCC is provided in the alternative.  Alternative A offers the states the option of repealing the whole of Article 6.  Alternative B offers a revised and updated Article 6 to those states and jurisdictions that will evaluate the positions of creditors, sellers, and buyers, and then decide to retain a bulk sales law. 

 

 How is uniformity to be served and maintained when states are given these alternatives?  The law of the seller's place of business controls the choice of law.  If the seller in a bulk sale has his or her place of business in a state in which Article 6 has been repealed, then there is no bulk sales law applicable to the sale.  If the state does have Revised Article 6, it applies.  No conflict situation should arise.

 

Revised Article 6, if repeal is not chosen, remedies the problems of the original.  It minimizes the burdens placed upon the bulk sale buyer.  The object is to pinpoint the creditor's risk and to narrow the reach of the statute to cover that risk and no more.  Much improvement accrues through the definitions of such terms as "assets,@ "bulk sale,@ "date of bulk sale,@ and the like, all of which increase the certainty of Revised Article 6.  None of these terms are defined at all in the original Article 6.

 

A "bulk transfer" under original Article 6 took place with the transfer "of a major part of the materials, supplies, merchandise or other inventory" outside the ordinary course of business.  Revised Article 6 defines "assets" as "inventory that is subject of a bulk sale and any tangible and intangible personal property used or held for use primarily in, or arising from, the seller's business and sold in connection with that inventory..."  The reach of Article 6 is more clearly confined in Revised Article 6.

 

In Revised Article 6 a "bulk sale" takes place if there is a sale of "more than half the seller's inventory"  outside the ordinary course of business and under conditions in which the "buyer has notice...that the seller will not continue to operate the same or a similar kind of business after the sale.@  Again the reach of Article 6 is limited and more clearly defined than under the original Article 6.  The risk to creditors arises from the sale in which the seller goes out of business, so Revised Article 6 applies only to those situations.

 

The notion of limitations is carried forward in the extended exceptions provision in Revised Article 6.  Certain kinds of transfers are excepted under original Article 6.  Any transfer that secures an obligation or that is accomplished to satisfy an obligation is not subject to original Article 6.  A sale or transfer of a business that preserves existing creditors' rights is not subject to original Article 6.  Revised Article 6 improves upon the existing exceptions with some new notice requirements for buyers who will assume the seller's debts. 

 

Revised Article 6, also, excepts for the first time any asset sales that fall below a net value of $10,000.00 or that exceed a value of $25,000,000.00.  In neither case is there a perceived need to burden the buyer with the requirements of Article 6.  The small amounts constitute a nuisance, and the very large "bulk sale" can hardly be done in a manner unknown to creditors and, indeed, to the world.

 

What a buyer in a bulk sale does under Revised Article 6 is primarily the same as what that buyer does under original Article 6.  The buyer obtains a list of creditors ("claimants" under Revised Article 6) and provides them with notice of the "bulk sale.@  The notice requirements are different, however, under Revised Article 6.  If the seller provides a list of 200 or more claimants, or provides a verified statement that there are more than 200, the buyer satisfies the notice requirement by filing a written notice of the "bulk sale" with the office of the Secretary of State (or other applicable official, as a state provides) rather than by giving written notice to all claimants.  One of the great burdens to buyers under original Article 6 is individual notice to large numbers of creditors.  Revised Article 6 simplifies the process. 

 

Revised Article 6, also, provides for a different array of information that is kept for creditors (or claimants).  Under original Article 6, the buyer kept a schedule of property and a list of claimants for a six month period following the sale.  These are not requirements of Revised Article 6.  Instead, the seller and buyer must agree on the net contract price to be distributed, and then must set forth "a written schedule of distribution.@  The "schedule of distribution" may provide for any distribution that the seller and buyer agree to, "including distribution of the entire net contract price to the seller ...@  The schedule of distribution accompanies any notice given to claimants, however given.

 

The last significant change from the original Article 6 in Revised Article 6 is the basic remedy available to creditors.  In original Article 6, the creditor voids the sale.  Revised Article 6 provides for money damages rather than for voiding the sale.  The creditor is entitled to damages for noncompliance in an amount to equal his or her real losses.  There are cumulative limits on the damages that may be assessed, and buyers are given the defense of "good faith" efforts to comply with Article 6.

 

Auctioneers and liquidators continue to be covered by Revised Article 6.  Those who conduct auction sales and liquidation sales are treated as "bulk sale" buyers, and must provide notice to claimants as "bulk sale" buyers are required to do.  The notice form is different and tailored to auction or liquidation sales.

 

Revised Article 6 extends the statute of limitations on creditor's actions from six months to one year.  Original Article 6 provided for six months.  The period runs from the date of the "bulk sale.@  Concealed sales toll the statute of limitations in Revised Article 6, as they do under original Article 6.

 

Repeal or revise are the options offered to the states in the Revised Article 6 of the UCC.  Repeal is the preferred option, but the revisions in Alternative B eliminate the significant difficulties encountered under original Article 6, and make them an excellent alternative to repeal.