This is another
segment where we examine the purpose of the articles contained in the
Uniform Commercial Code. Although revised article six has been enacted by
forty states since it was introduced in 1989, most of whom repealed the
article, there are still ten states and two districts who have not
addressed the revisions suggested by the National Conference of
Commissioners on Uniform State Laws (NCCUSL) twenty-two years ago. This
District of Columbia
have proposals on their legislative dockets.
6 of the Uniform Commercial Code (UCC) was established to provide
protection to creditors from those businesses that sell merchandise from
inventory. Creditors of these
business were, at the turn of the century, vulnerable to a "bulk
in which the business owner sold all or a large part of his inventory to a
single buyer outside the ordinary course of business, following which the
owner took the proceeds of the sale and often fled to another state.
The original Article 6 of the UCC required that "bulk
sale" buyers provide notice to the seller's creditors and to maintain
a list of the seller's creditors and a list of the property sold in a
for six months after the "bulk sale" took place.
Unless these procedures were followed, the creditors had the right
to void the sale. Third
parties such as auctioneers, who handle merchandise in bulk, were given
similar procedures to follow.
purpose of Article 6 was to replace numerous bulk sales laws enacted in
the various states. These state laws protected local business creditors
from inventory liquidations that could take merchandise and proceeds
beyond the creditors' ability to obtain a remedy.
Article 6 introduced the quality of uniformity of these protections
for creditors regardless of the state they were in by introducing a
"long arm" statute that permitted the creditor to void the sale.
the credit environment eventually changed, so did the risk of the business
owner selling off his inventory in bulk and fleeing with the proceeds to
another jurisdiction. Business
creditors today can evaluate creditworthiness far better than was the case
when the UCC was first envisioned, and they can pursue delinquent
customers across state lines with much less difficulty.
Further, modern fraudulent transfer actions under the Uniform
Fraudulent Transfer Act overlap Article 6 in a significant way.
Widespread inventory financing under Article 9 of the UCC, which
provides even more significant protections for creditors, simply bypassed
the Article 6 protections. In
1988, as revisions of Article 6 were being considered, there was a large
majority in favor that supported the repeal of Article 6.
That majority perceived that the balance of equities had swung from
protection for creditors to unnecessary burdens placed upon the "bulk
was never determined, however, that repeal of Article 6 was a uniform
solution or a uniformly acceptable recommendation in every state and
jurisdiction. So the Revised
Article 6 of the UCC was provided with two alternatives.
Alternative A offers the states the option of repealing the entire
original Article 6. Alternative
B offers a revised and updated Article 6 to those states and jurisdictions
so that they can evaluate the positions of creditors, sellers, and buyers,
and then decide whether to retain a bulk sales law or not. Many states
that have repealed Article 6 have incorporated several of the components
of both Article 6 and alternative plan B into their individual state
business and commerce laws.
question often asked is "How is uniformity achieved 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 original Article
6 has been repealed, then there is no bulk sales law applicable to the
sale unless the bulk sales law now exists in the states' business and
commerce code. If the state
enacted Revised Article 6, it applies.
Article 6 remedies the problems of the original Article 6.
It minimizes the burdens placed upon the bulk sale buyer.
The object was to identify the creditor's risk and to narrow the
reach of the statute to cover that risk and nothing more.
Much improvement accrues through the definitions of such terms as
"date of bulk sale,@
all of which increase the certainty of Revised Article 6.
None of these terms were defined in the original Article 6.
"bulk transfer" under original Article 6 took place when there
was a 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
property used or held for use primarily in, or arising from, the seller's
business and sold in connection with that inventory"
The scope of Article 6 is more clearly defined in Revised Article
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 scope of Revised Article 6 is limited and more clearly
defined than under the original Article 6.
The risk to creditors arises from the sale whereby the seller goes
out of business, so Revised Article 6 applies only to those situations.
notion of limitations is carried forward in the extended exceptions
provision in Revised Article 6. Certain
kinds of transfers are accepted under original Article 6.
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.
Article 6, also, exempts, 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 Revised Article 6.
The small amounts are determined to be a nuisance, and the very
large "bulk sale" is considered to be unable to transact in a
manner unknown to creditors.
a buyer in a bulk sale does under Revised Article 6 is primarily the same
as what that buyer did 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 claimants, 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 the
state requires) rather than by giving written notice to all claimants.
One of the great burdens to buyers under original Article 6 was the
individual notices to large numbers of creditors.
Revised Article 6 simplifies the process.
Article 6, also, provides for different types 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 no longer requirements under 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
"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, regardless in what manner it is given.
final significant change from the original Article 6 found 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 equal to the
creditors' 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
parties such as 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 specific and tailored to auction or liquidation
Article 6 also extends the statute of limitations on creditor's actions
from six months to one year. Original
Article 6 only provided for six months.
The period commences on the date of the "bulk sale.@
Any concealed sales extend the statute of limitations in Revised
Article 6 just as they did in the original Article 6.
or revision is the two options offered to the states under the Revised
Article 6 of the UCC. Repeal
is the recommended option of the NCCUSL, however the revisions in
Alternative B eliminate the significant difficulties creditors encountered
under original Article 6, and is still a reasonable alternative to repeal.
I wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or