Bulk Sales in California

The California Commercial Code, in Division 6, deals with bulk sales. Section 6101 makes the division known as the Uniform Commercial Code—Bulk Sales.

Section 6102 provides definitions for the following terms: “assets,” “auctioneer,” “bulk sale,” “claim,” “claimant,” “creditor,” “date of the bulk sale,” “date of the bulk sale agreement,” “debt,” “liquidator,” “net contract price,” “net proceeds,” “in the ordinary course of the seller’s business,” “United States,” “value,” “verified,” “buyer,” “equipment,” “inventory,” “sale,” and “seller.”

Section 6103 states that this division applies to a bulk sale if the seller’s principal business is the sale of inventory from stock, including those who manufacture what they sell, or that of a restaurant owner; and, on the date of the bulk-sale agreement the seller is located in this state or the seller’s major executive office in the United States is in this state. In addition, this division does not apply to any of the sixteen specified transactions. The notice is required to state each of five specified items.

Section 6104 requires in a bulk sale for the buyer to do three specified tasks. Section 6105 requires a notice to comply with five specified requirements. At least 12 business days before the date of the bulk sale, a notice that is governed by this section must meet three specified conditions. The publication of notice in a public notice district is governed by specified statutes. The term “business day” is defined.

Section 6106.2 states that this section applies only to a bulk sale where the consideration is $2,000,000 or less and is substantially all cash or an obligation of the buyer to pay cash in the future to the seller or a combination. Upon every bulk sale subject to this section, except one made by sale at auction or a sale or series of sales conducted by a liquidator on the seller’s behalf, it is the duty of the buyer or, if the transaction is handled through an escrow, the escrow agent to apply the cash consideration in accordance with this section so far as necessary to pay those debts of the seller for which claims are due and payable on or before the date of the bulk sale and are received in writing on or prior to the date specified as the last date to file claims with the person designated in the notice to receive claims. This duty of the buyer or escrow agent runs to each claimant timely filing the claim.

The buyer or escrow agent is required, within 45 days after the buyer takes legal title to any of the goods, either pay to the extent of the cash consideration the claims filed and not disputed, or the applicable portion thereof to the extent of the cash consideration, or institute an action in interpleader and deposit the consideration with the clerk of the court. The notice is required to state specified information.

Section 6106.4 provides that, in any case where the notice of a bulk sale states that claims may be filed with an escrow agent, the intended buyer must deposit with the escrow agent the full amount of the purchase price or consideration. If, at the time the bulk sale is otherwise ready to be consummated, the amount of cash deposited or agreed to be deposited at or prior to consummation in the escrow is insufficient to pay in full all of the claims filed with the escrow agent, the escrow agent is required to delay the distribution of the passing of legal title for a period of not less than 25 days nor more than 30 days from the date the notice.In addition, there must be the distribution of the consideration in the specified order of six priorities set forth in this section.

Section 6107 states that a buyer who fails to comply with the requirements with respect to a claimant is liable to the claimant for damages in the amount of the claim, reduced by any amount that the claimant would not have realized if the buyer had complied. In an action, 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.

A buyer who made a good faith and commercially reasonable effort to comply with the requirements or to exclude the sale from the application of this division is not liable to creditors for failure to comply with the requirements. The buyer has the burden of establishing the good faith and commercial reasonableness of the effort. In a single bulk sale, the cumulative liability of the buyer for failure to comply with the requirements may not exceed an amount equal to any of the specified amounts. The term “net value” is defined.

If a debt is secured by an asset and other property of the seller, the amount of the debt secured by a security interest or lien that is enforceable against the asset is determined by multiplying the debt by a fraction, the numerator of which is the value of the asset on the date of the bulk sale and the denominator of which is the value of all property securing the debt on the date of the bulk sale.

The portion of a part of the net contract price paid to or applied for the benefit of the seller or a creditor that is “allocable to the inventory and equipment” is the portion that bears the same ratio to that part of the net contract price as the net value of the inventory and equipment bears to the net value of all of the assets. A payment made by the buyer to a person to whom the buyer is, or believes it is, liable reduces pro tanto the buyer’s cumulative liability.

A buyer’s failure to comply with the requirements does not result in any four specified conditions. Payment of the buyer’s liability discharges pro tanto the seller’s debt to the creditor. Also, a buyer has an immediate right of reimbursement from the seller for any amount paid to a creditor in partial or total satisfaction of the buyer’s liability.

Section 6108 modifies the terms “buyer” and “net contract price” for bulk sales by auction and bulks sales conducted by a liquidator on the seller’s behalf. The written notice required must be accompanied by a statement that the sale is to be by auction or by liquidation, the name of the auctioneer or liquidator, and the time and place of the auction or the time and place on or after which the liquidator will begin to sell assets on the seller’s behalf.

In a single bulk sale, the cumulative liability of the auctioneer or liquidator for failure to comply with the requirements of this section may not exceed the amount of the net proceeds of the sale allocable to inventory and equipment sold less the amount of the portion of any part of the net proceeds paid to or applied for the benefit of a creditor which is allocable to the inventory and equipment.

Section 6110 provides that an action under this division against a buyer, auctioneer, or liquidator is to be commenced within one year after the date of the bulk sale. If the buyer, auctioneer, or liquidator conceals the fact that the sale has occurred, the limitation is tolled and an action under this division may be commenced within the earlier of two specified occurrences.