1981 Ed., § 28:6-107.
1973 Ed., § 28:6-107.
Uniform Commercial Code Comment
Prior Uniform Statutory Provision: None.
Purposes: 1. This section sets forth the consequences of noncompliance with the requirements of Section 6-104. Although other legal consequences may result from a bulk sale—e.g., the buyer may be liable to the seller under Article 2 or to the seller’s creditors under the Uniform Fraudulent Transfer Act—no other consequences may be imposed by reason of the buyer’s failure to comply with the requirements of this Article.
The two subsections of Section 6-107(1) reflect the duties set forth in Section 6-104. The duties generally run only to claimants, but the duty to distribute the net contract price in accordance with the schedule of distribution ( Section 6-104(1)(e)) may run also to certain creditors.
2. Article 6 (1987 Official Text), like many of its nonuniform predecessors, makes a noncomplying transfer ineffective against aggrieved creditors. In contrast, noncompliance with this Article neither renders the sale ineffective nor otherwise affects the buyer’s rights in or title to the assets.
Liability under this Article is for breach of a statutory duty. The buyer’s only liability is personal (in personam) liability. Aggrieved creditors may only recover money damages. In rem remedies, which are available upon noncompliance with Article 6 (1987 Official Text), are not available under this Article. Thus, aggrieved creditors no longer may treat the sale as if it had not occurred and use the judicial process to apply assets purchased by the buyer toward the satisfaction of their claims against the seller.
The change in the theory of liability and in the available remedy should be of particular significance if the seller enters bankruptcy after the sale is consummated. When an aggrieved creditor of the transferor has a nonbankruptcy right to avoid a transfer in whole or in part, as may be the case under Article 6 (1987 Official Text), the transferor’s bankruptcy trustee may avoid the entire transfer. See Bankruptcy Code s 544(b), 11 U.S.C. § 544(b). Under this Article, a person who is aggrieved by the buyer’s noncompliance may not avoid the sale. Rather, the person is entitled only to recover damages as provided in this section. Because no creditor has the right to avoid the transaction or to assert a remedy that is the functional equivalent of avoidance, the seller’s bankruptcy trustee likewise should be unable to do so.
3. This Article makes explicit what is implicit in Article 6 (1987 Official Text): only those persons as to whom there has been noncompliance are entitled to a remedy. For example, if notices are sent to each claimant other than claimant A, claimant B cannot recover. Similarly, a creditor who acquires a claim after notice is given has no remedy unless the buyer undertakes in the schedule of distribution to pay that creditor and the buyer fails to meet the obligation.
4. Unlike Article 6 (1987 Official Text), which imposes strict liability upon a noncomplying transferee, this Article imposes liability for noncompliance only when the failure to comply actually has injured a creditor and only to the extent of the injury. Each creditor’s damages are measured by the injury that the particular creditor sustained as a consequence of the buyer’s failure to comply. This measure is stated as the amount of the debt reduced by any amount that the person would not have realized if the buyer had complied. Compare Section 4-103(5).
5. A buyer is liable only for the buyer’s own noncompliance with the requirements of Section 6-104. Under that section, the only step the buyer must take to discover the identity of the seller’s claimants is to obtain a list of claimants from the seller. If the seller’s list is incomplete and the buyer lacks knowledge of claimant C, then claimant C has no remedy under subsection (1)(b) of this section.
6. The creditor has the burden of establishing the validity and amount of the debt owed by the seller as well as the fact of the buyer’s noncompliance. In contesting the allegation of noncompliance, the buyer may introduce evidence tending to show either that the sale was not a bulk sale or that the sale was a bulk sale to which this Article does not apply. In contesting the validity and amount of the debt, the buyer may introduce evidence tending to show that the seller had a defense to the debt. The buyer has the burden of establishing the amount that the creditor would not have realized even if the buyer had complied. Implicit in subsection (2) is that certain failures to comply with the requirements of this Article will cause no injury and thus result in no liability.
The following examples illustrate the operation of subsection (2):
Example 1: The buyer fails to give notice of the bulk sale. Claimant D, who appears on seller’s list of claimants, admits to having had actual knowledge of the impending sale two months before it occurred. The buyer is likely to be able to meet the burden of establishing that even had the buyer given notice of the sale, claimant D would not have recovered any more than the claimant actually recovered.
Example 2: The buyer failed to obtain a list of seller’s business names ( Section 6-104(1)(a)) or to make available the list of claimants. ( Section 6-104(1)(f)). In many cases, the buyer may be able to meet the burden of establishing that compliance with those subsections would not have enabled claimants to recover any more than they actually recovered.
7. Subsection (3) may afford a complete defense to a noncomplying buyer. This defense is available to buyers who establish that they made a good faith effort to comply with the requirements of this Article or made a good faith effort to exclude the sale from the application of this Article (e.g., by assuming debts and attempting to comply with the notice requirements of Section 6-103(3)(i), (j), or (k)). When a buyer makes a good faith effort to comply with this Article or to exclude the transaction from its coverage, the injury caused by noncompliance is likely to be de minimis. In any event, the primary responsibility for satisfying claims rests with the creditors, and this Article imposes no greater duty upon buyers who attempt to comply with this Article or to exclude a sale from its application than to make a good faith effort to do so.
The defense of subsection (3) also is available to buyers who act on the good faith belief that this Article does not apply to the sale (e.g., because the sale is not a bulk sale or is excluded under Section 6-103). The good-faith-belief defense is an acknowledgement that reasonable people may disagree over whether a given transaction is or is not a bulk sale and over whether Section 6-103 excludes a particular transaction. A buyer acting in good faith should be protected from the liability that this Article otherwise would impose on buyers who may be completely innocent of wrongdoing. A buyer who is unaware of the requirements of this Article holds no belief concerning the applicability of the Article and so may not use the defense.
8. Even a buyer who completely fails to comply with this Article may not be liable in an amount equal to sum of the seller’s debts. Subsection (4) limits the aggregate recovery for “any one bulk sale,” which term includes a series of sales by a liquidator. The maximum cumulative liability for noncompliance with this Article parallels the maximum recovery generally available to creditors under the 1987 Official Text of Article 6. Under that Article, the noncomplying transferee may have to “pay twice“ for the goods. First, the transferee may pay the purchase price to the transferor; then, the transferee may lose the goods to aggrieved creditors.
Under this Article, the maximum cumulative liability is an amount equal to twice the net contract price of the inventory and equipment (i.e., twice the amount that would be available to unsecured creditors from the inventory and equipment), less the amount of any portion of that net contract price paid to or applied for the benefit of the seller or a creditor of the seller. Unless the buyer receives credit for amounts paid to the seller (which amounts the creditors have a right to apply to payment of their claims), the buyer might wind up paying an amount equal to the net contract price three times (once to the seller and twice to aggrieved creditors). The grant of credit for amounts paid to the seller’s creditors recognizes that ordinarily the seller has no obligation to pay creditors pro rata.
When the assets sold consist of only inventory and equipment, calculation of the maximum cumulative liability is relatively simple. But when the assets sold include property in addition to inventory and equipment, the calculation becomes more difficult. When inventory or equipment secures a debt that also is secured by other collateral and the aggregate value of the collateral exceeds the secured debt, a determination of the amount in clause (ii) of subsection (5) may require an allocation of the collateral to the debt in accordance with the statutory formula. In addition, one may need to determine which portion of payments of the net contract price is allocable to inventory and equipment. Subsection (5) directs that this allocation be made by multiplying the part of the net contract price paid to or applied for the benefit of the seller or a creditor by a fraction whose nominator is the net value of the inventory and equipment and whose denominator is the net value of all the assets.
Sometimes the seller may receive the net contract price and pay some or all of it to one or more creditors. In determining whether a payment to a creditor was made from the net contract price or from another source, courts are free to employ tracing rules. Amounts paid to secured parties usually are taken into account in determining the net contract price; if so, the buyer should not receive credit for them.
9. The buyer need not wait for judgment to be entered before paying a person believed to be a creditor of the seller. Indeed, the buyer is entitled to credit for amounts paid to persons who in fact may not be creditors of the seller, as long as the buyer acts with the belief that the seller is so indebted. As is the case with respect to all obligations under the Code, the buyer’s belief must be held in good faith.
10. Any amounts paid by the buyer in satisfaction of the liability created by Section 6-107(1) reduce the seller’s liability to the recipient pro tanto. Consequently, the buyer is entitled to immediate reimbursement of those amounts from the seller. The right of reimbursement is available only for amounts paid to actual creditors. Amounts paid to those whom the buyer incorrectly believes to be creditors ordinarily are not recoverable from the seller, although the buyer is entitled to credit for those amounts against the aggregate liability in subsection (4). Of course, the buyer and seller may vary the seller’s reimbursement obligation by agreement.
11. Because of the difficulty in valuing claims that are unliquidated or contingent, persons holding claims of that kind may not bring an action under subsection (1)(b). If the claim remains unliquidated or contingent throughout the limitation period in Section 6-110, then these creditors have no remedy for noncompliance under that subsection. They may, however, be entitled to a remedy under subsection (1)(a) or (11) for failure to distribute the net contract price in accordance with the schedule of distribution.
12. In certain circumstances, subsection (11) imposes liability on a person in direct or indirect control of a seller that is an organization. Excuse under Section 6-106(6) is a “legal justification” that prevents liability from attaching under subsection (11). No special provision applies to the seller who fails to comply with the schedule. The seller already owes the debt to the creditor, and other law governs the consequences of a debtor who fails to pay a debt when promised.
Cross-References: Point 1: Section 6-104.
Point 4: Section 4-103.
Point 5: Sections 6-104 and 6-105.
Point 6: Sections 1-201, 6-102, 6-103, and 6-104.
Point 7: Sections 1-102, 1-201, 6-102, and 6-103.
Point 8: Section 6-102.
Point 9: Section 1-203.
Point 10: Section 1-102.
Point 11: Sections 6-102 and 6-110.
Point 12: Section 6-106.
Definitional Cross-References: “Assets”. Section 6-102.
“Bulk sale”. Section 6-102.
“Burden of establishing”. Section 1-201.
“Buyer”. Section 2-103.
“Claim”. Section 6-102.
“Claimant”. Section 6-102.
“Creditor”. Section 6-102.
“Date of the bulk sale”. Section 6-102.
“Equipment”. Section 6-102.
“Good faith”. Section 6-102.
“Inventory”. Section 9-109.
“Net contract price”. Section 6-102.
“Organization”. Section 1-201.
“Person”. Section 1-201.
“Proceeds”. Section 9-306.
“Security interest”. Section 1-201.
“Seller”. Section 2-103.
“Written”. Section 1-201.