Bulk Transfers
| Publication year | 1983 |
| Pages | 590 |
1983, April, Pg. 590. Bulk Transfers
Sales of the assets of a business require compliance with the Bulk Transfer Act.(fn1) Colorado law was revised in 1978 to expand the definition of enterprises subject to Article 6. The uniform version of Article 6 has been extensively interpreted by other jurisdictions to modify and extend the effect of the creditor protection contained in the bulk transfer provisions.
In particular, the evil which the Bulk Transfer Article seeks to remedy arises when a merchant, who owes money to creditors and without any notice to them, transfers all or most of the inventory and assets of the business to some third party. When the creditors learn of the transaction, the transfer has already been completed. To their dismay, the creditors then realize that the transfer has been fraudulent or that their debtor-merchant has absconded with the proceeds of the transfer.
Article 6 requires that the transferee give at least a ten-day notice to creditors that a bulk transfer is about to be consummated. The theory is that, with such prior notice, creditors can take necessary action to prevent dissipation of the proceeds of the transaction before their claims are paid.
Under the uniform version of the Bulk Transfer Act, only those enterprises whose principal business is the sale of merchandise from stock are subject to the Article.(fn2) Thus, those merchants whose principal business is something other than the selling of the merchandise from stock can forget about the Bulk Transfer Act completely in most states. However, Colorado has expanded the definition of a bulk transfer to include the following:
In Colorado, therefore, all enterprises which enter into a transaction involving a transfer that is subject to Article 6 will be required to comply with the Bulk Transfer Act as a necessary element of the transfer.The enterprises subject to this article are all those of a person engaged in the business of selling and dealing in goods, wares, merchandise, or services of any kind or description.(fn3)
Once it is concluded that a particular enterprise is subject to Article 6, it does not follow that every transfer of the assets from that enterprise is a bulk transfer. A bulk transfer could occur two ways: First, the transfer must constitute a major part of the materials, supplies, merchandise or other inventory of the business which occurs outside the ordinary course of business. Second, the transfer involves a substantial part of the equipment of the business.(fn4)
Just what quantity is meant by a "major" part of the materials, supplies, merchandise or inventory is not entirely clear. One commentator has suggested that the word "major" was intended to mean the same as majority.(fn5) Thus, a bulk transfer would take place only where a majority or more than 50 percent of such items are transferred.(fn6)
Under the uniform version of the statute, a transfer of equipment, such as the fixtures or machinery of a business, by itself, is never a bulk transfer. A transfer of equipment will be a bulk transfer only if two elements co-exist: (1) the transfer is made in connection with a bulk transfer of inventory and (2) the equipment transferred constitutes a substantial part of the total equipment of the business. If either of these elements is missing, then the equipment transfer cannot be a bulk transfer under the uniform version of the Code.(fn7)
Under Colorado law, however, a transfer of a substantial part of the equipment of an enterprise is a bulk transfer whether or not it is made in connection with a bulk transfer of inventory.(fn8) Equipment is defined as goods used or bought for use primarily in business (including farming or a profession) or other goods which are not otherwise included in the definitions of inventory, farm products or consumer goods of Article 9 of the Code.(fn9)
What percentage of a person's equipment must be transferred before it becomes a substantial part of his total equipment? Unfortunately, the answer is not clear. Some commentators have suggested that the word "substantial" (the quantity word in Article 6 used in connection with bulk transfer of equipment) was intended to mean a lesser quantity than the word "major" (the quantity word in Article 6 used in connection with the amount of inventory needed to constitute a bulk transfer of inventory).(fn10) Presumably, the transfer of a substantial part of the equipment must occur in a transaction outside the ordinary course of the transferor's business, although the Colorado revisions to the uniform version of the Code obscures that issue.
The separation of the "substantial part of the equipment" of a business from the section which applies to the inventory of that business will require a judicial interpretation to superimpose the outside "the ordinary course of business" element to equipment transfers. It is likely that the statute was intended to cover a transfer of equipment only if it occurred in a transaction "which is an extraordinary event, one occurring only a few times in the life of a merchant."(fn11)
The failure of Article 6 to define clearly the words "major" and "substantial" poses difficult practical questions to the commercial world in determining whether a particular transfer is actually a "bulk transfer." It would seem that if the risk of subsequent litigation is to be avoided, then Article 6 should be followed...
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