One of the key issues in any sale of dealership assets is whether a bulk sale notice is required under California law prior to the closing of the transaction. It is important to understand when a bulk sale notice is required because the failure to give the notice when required can result in potentially serious adverse consequences for both the buyer and the seller.
When California bulk sales law applies
Bulk sales laws and notification requirements vary widely from state to state but in California they only apply to transactions with all of the following characteristics:
- The sale of assets is outside of the ordinary course of business for the seller.
- The seller is selling over half of its inventory and equipment (whose value is calculated on the date of the asset purchase agreement).
- The seller’s principal business is selling inventory from stock (including manufacturer sellers) or the seller is a restaurant.
- The seller is located in California or has its major US executive office in California.
The vast majority of dealership asset sales in California will meet these criteria, so the next step is to determine whether or not there are any available exemptions to the bulk sales notification requirements.
Exemptions to California’s bulk sales notification requirements
A transaction may be exempt from California bulk sales notification requirements even if it has all of the characteristics listed in the prior section. Though there are numerous exemptions (many apply only to sales made through bankruptcy or other judicial proceedings), the key exemptions which come into play include:
- A sale of assets with a value net of liens and security interests of less than $10,000.
- A sale of assets with a value of more than $5,000,000.
It is therefore important for the parties and their attorneys to determine at the outset – certainly prior to the execution of the asset purchase agreement— whether the value of the assets being transferred will render the transaction exempt from the bulk sales notification requirements. That determination will affect the drafting of the agreement as it pertains to compliance with the bulk sales law.
When California’s bulk sales law applies without any available exemption, the buyer is required to:
- Obtain a list of all business names and addresses used by the seller within the prior three years.
- Give notice of the bulk sale pursuant to California Uniform Commercial Code Section 6105.
- If the bulk sale is a “Small Cash Sale,” meaning the sale price is less than $2 million and being paid primarily in cash, comply with California Uniform Commercial Code Section 6106.2.
The following steps must be completed by the buyer at least 12 business days prior to bulk sale, to give proper notice of the bulk sale under California Uniform Commercial Code Section 6105:
- Record the notice in the recorders office of the county where the tangible assets are located.
- Publish the notice in a generally circulated newspaper in the county where the tangible assets are located (and in the county where seller is located, if a different county).
- Deliver the notice to the county tax collector in the county where the tangible assets are located.
The notice must state the following:
- That a bulk sale is about to be made.
- All names and business addresses used by seller within the past three years and buyer’s current name and business address.
- The location and general description of the assets.
- The place and anticipated date of the bulk sale.
- Whether the sale is a Small Cash Sale (and if so, claim information required under California Uniform Commercial Code Section 6106.2).
Consequences of not providing notice when required
If the buyer fails to comply with California’s bulk sales law notice requirement in a qualifying transaction, the asset transfer remains valid but the buyer may be liable to the seller’s creditors. Such creditors have one year after the date of the bulk sale to bring any claims against the buyer for failure to give a bulk sale notice. However, the buyer has an immediate right of reimbursement from the seller for any amounts that the buyer paid to the seller’s creditors in partial or total satisfaction of their claims.
Drafting appropriate buy sell provisions
When the bulk sales law clearly does not apply, the parties may include a provision in the asset purchase agreement waiving compliance with the provisions of California’s bulk sales law and that any liabilities arising from any failure to comply with bulk sales laws are not assumed by the buyer. When the bulk sales law does apply, the buyer should insist on a provision that requires the seller to provide all information necessary or useful for completing the bulk sales notice, reasonably in advance of the closing (and at least prior to buyer’s twelve day notice deadline).
The Bulk Sales Law should never be overlooked in an asset sale. The parties and their attorneys must make an early determination as to whether a bulk sale notice is required, and, if it is, take steps to ensure that a proper notice is timely recorded and published. For this reason we recommend that commercial asset buyers and sellers always use experienced legal counsel in their sale transactions.