Transfer Documents
Compliance with Bulk Sales Laws
The Bulk Sales Laws are designed to prevent sellers from defrauding creditors by either (1) selling the business for less than the market price and paying creditors less than the amount owed or (2) simply selling the business to a good faith purchaser and disappearing with the proceeds.
- Filing and Publication of Notice - to protect creditors, California law requires a buyer to record and publish advance notice of the sale. Further, in a small cash sale of not more than $2,000,000, the buyer or escrow agent is authorized to impound and control the distribution of the proceeds, and must apply the sale proceeds to the seller's debts before paying the seller.
- Sales Subject to Bulk Sales Law - a ''bulk sale'' is any sale outside the ordinary course of the seller's business of more than one half of seller's inventory and equipment, as measured by the fair market value on the date of the bulk sale agreement
- Sales Exempt from Bulk Sales Law – although there are a number of exemptions, the one most applicable relates to a sale of assets having either (a) a value, net of liens and security interests, of less than $ 10,000 or (b) a value of more than $ 5 million on the date of the bulk sale agreement.
- Determining if Business Is Subject to Bulk Sales Law - the Bulk Sales Law applies to a bulk sale if both of the following conditions exist: (a) the seller's principal business is the sale of inventory from stock, including those who manufacture what they sell, or is that of restaurant owner; and (b) the seller is located in California.
- Failure to Comply With Bulk Sales Law - in general, if a buyer fails to comply with the bulk sale notice requirements, with respect to one or more claimants, the buyer is liable for damages in the amount of any claims against the seller, less any amount that the claimant would not have realized if the buyer had complied with the notice requirements. The claimant has the burden of establishing the validity and amount of the claim, and the buyer has the burden of establishing the amount that the claimant would not have realized if the buyer had complied. An exception to liability applies where the buyer made a good faith effort to comply with the requirements of the Bulk Sales Law.
- Limitations on Buyer's Liability - no action may be brought by or on behalf of a claimant whose claim is unliquidated or contingent.
- Time for Commencement of Action - an action under the Bulk Sales Laws against a buyer, auctioneer, or liquidator must ordinarily be commenced within one year after the date of the bulk sale.
- Complying with Notice Requirements:
- Notice of Sale - In any bulk sale subject to the Bulk Sales Law, the buyer must do all of the following: (i) obtain from the seller a list of all business names and addresses used by the seller within three years before the date that the list is sent or delivered to the buyer; (ii) give notice of the bulk sale; and (iii) comply with the distribution requirements applicable to small cash bulk sales.
- Notice Contents - The notice referred to above must state all of the following: (i) that a bulk sale is about to be made; (ii) the names and business addresses of the buyer and seller (note: the buyer must include all other business names and addresses used by the seller within the past three years, to the extent known); (iii) the location and general description of the property to be transferred; (iv) the place and the anticipated date of the bulk sale; (v) whether or not the bulk sale is a small cash sale (i.e., 2 million or less) and if so, the notice must also state the name and address of the person with whom claims may be filed and the last date (which must be the business day before the noticed sale date) for filing claims.
- Recording, Publishing and Delivering Notice - at least 12 business days before the date of the bulk sale, the buyer must take three actions with respect to the notice of bulk sale:
- first, the buyer must record the notice in the office of the county recorder of the county or counties in California in which the tangible assets are located and, if different, in the county in which the seller is located at least 12 business days before the date of the bulk sale;
- second, the buyer must publish the bulk sale notice at least 12 business days before the date of the bulk sale in a newspaper of general circulation published in the judicial district in which the tangible assets are located and, if different, in the judicial district in which the seller is located;
- third, the buyer must deliver the notice or send the notice by registered or certified mail to the county tax collector in the California county or counties in which the tangible assets are located at least 12 business days before the date of the bulk sale.
- Paying Creditor Claims
- Transactions Subject to Payment Requirements - the Bulk Sales Law imposes additional requirements on the payment of creditor claims when the consideration for the bulk sale is $ 2 million or less and is either substantially all cash, an obligation of the buyer to pay cash in the future to the seller, or a combination of the two.
- Obligations of Buyer - in a small cash sale, the buyer (or an escrow agent if the transaction is handled through an escrow) has a duty to apply the consideration in accordance with statutory distribution requirements. This duty extends so far as is necessary to pay those debts of the seller for which claims are both (1) due and payable on or before the date of the bulk sale and (2) filed in writing on or before the date specified as the last date to file claims with the person designated in the notice to receive claims.
- Submission of Claims to Seller and Disputes Claims - the buyer or escrow agent should submit all creditor claims to the seller for approval or rejection. If the seller disputes whether a claim is due and payable on the noticed sale date, or disputes the amount of any claim, the buyer or escrow agent must withhold from distribution an amount specified by statute.
- Payment of Undisputed Claims - with respect to timely claims that the seller does not dispute, the buyer or escrow agent, within 45 days after closing (that is, passing of legal title), must either
- pay the claims to the extent of the cash consideration, or
- institute an interpleader action. Note that when the total creditor claims exceed the amount of the cash deposit, there are additional notice and payment requirements to fulfill.
