If your buying or selling a business, or helping a client buy or sell a
business, you will likely be faced with a provision requiring you to
comply with or waive compliance with the bulk transfer law. Should you
comply or should you waive compliance? Well, it depends...
WHAT IS THE BULK TRANSFER LAW?
The bulk transfer law is a law to protect business creditors. It
provides that if a buyer of a business notifies the creditors of the
seller in advance that it is buying the seller's assets, then the buyer
will not be liable to those creditors for the debts and obligations of the
seller. If, however, a buyer does not comply with the bulk transfer law,
then it is responsible to the seller's creditors after the purchase is
consumated. If you are a buyer, it would seem always to make sense to
comply with the bulk transfer law. Correct? Not necessarily.
HOW TO COMPLY
Compliance with the bulk transfer law is tedious:
* The parties must first determine whether the transaction is subject
to the bulk transfer law. Generally, a sale of assets is subject to the
law but there are exceptions. For example, if the buyer assumes the debts
of seller the bulk transfer law is inapplicable because the creditor has a
responsible party to look to for collection.
* The seller must prepare a list of creditors.
* The seller and buyer must prepare a schedule of the property to be
transferred to the buyer.
* The buyer must notify the seller's creditors at least ten days prior
to the transfer. The notice must comply with statutory requirements.
* The buyer must file the list of creditors and the schedule of
property transferred with the County Recorder.
Rather than go through the time and expense of compliance with the bulk
transfer law, buyers and sellers frequently agree to waive compliance.
However, buyers will demand some protection from the seller, if it agrees
HOW BUYERS PROTECT THEMSELVES
The best way to protect the buyer from liability for the seller's
creditors is to hold part of the purchase price in escrow for some period
of time. How much to hold in escrow can only be determined, however,
after the seller has disclosed information regarding its outstanding debts
and obligations. The prudent buyer will want the seller to represent that
the seller's disclosures are accurate and complete.
The buyer may also want the seller to indemnify it from any future claims
of the seller's creditors. However, indemnifications are only worthwhile
if the seller has assets and will be remaining in existence following the
sale of its assets.
OTHER TRAPS FOR THE BUYER
Even if a buyer complies with the bulk transfer law, it may still be
responsible for certain debts of the seller. For example, the buyer will
be liable for any upaid sales tax and withholding tax obligations of the
seller (including interest and penalties) that were accrued and unpaid at
the time the assets were transferred. The only way for the buyer to
protect itself from liability is to wihhold a sufficient amount of the
purchase price to pay the taxes.
Additionally, compliance with bulk transfer law does not protect the
buyer from liability for any taxes owed by the seller to the County
Treasurer. Only a certificate in a form prescribed by the Tax
Commissioner can do that. There may be other liabilities, such as tort
liabilities, that become the responsibility of the buyer under a successor
liability theory. And in the case of real estate, don't forget about
possible successor liability for environmental problems.
BE WARY OF "BULK" BOILERPLATE
Don't be fooled into thinking that provisions regarding compliance with
the bulk transfer law are meaningless boilerplate. Unanticipated
assumption of seller liabilities can make an attractive business deal a
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