If your buying or selling a business, you will likely be faced with a provision requiring you to comply with or waive compliance with the bulk transfer law. 3 min read
2. HOW TO COMPLY
3. HOW BUYERS PROTECT THEMSELVES
4. OTHER TRAPS FOR THE BUYER
5. BE WARY OF "BULK" BOILERPLATE
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 consummated. 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 to waive.
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 unpaid 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 withhold 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 financial nightmare.