Bulk Transfer Law Considerations in the Purchase of a Distressed Business

July 14, 2009

A purchaser (a “Purchaser”) who purchases a business in an asset purchase transaction and who complies with the requirements of Ch. 406 of the Wisconsin Statutes (the “Bulk Transfer Law”) may acquire the assets of a seller (a “Seller”) in a manner that is generally effective against the Seller’s creditors. That is, under certain circumstances, a Purchaser who complies with the provisions of the Bulk Transfer Law may acquire the assets of a distressed Seller free of the claims of such Seller’s creditors. Failure to comply with the Bulk Transfer Law, where it applies, may provide creditors the right to set aside the transaction. There are also certain exceptions and limitations to effectiveness against creditors: these include the fact that the Notice Period (defined below) may provide unsecured creditors with time to block the transfer and that the rights of secured creditors will not be blocked by compliance with the Bulk Transfer Law. The rights of creditors are discussed towards the end of this article.

What is a Bulk Transfer?
A preliminary question is: which transfers are subject to the Bulk Transfer Law? The short answer is that bulk transfers (“Bulk Transfers”) are subject to the Bulk Transfer Law. Bulk Transfers include:

  1. The sale or transfer, outside the ordinary course of business, of a major part of the value of a business’s inventory; and
  2. The sale or transfer of equipment, if the equipment is sold in connection with a bulk transfer of inventory outside the ordinary course of business and the equipment represents a substantial part of the Seller’s equipment, by a business whose principal business is the sale of merchandise from stock (including manufacturers). In addition, the Bulk Transfer Law specifically includes the transfer of merchandise and related fixtures by retailers of alcoholic beverages if the transfer is outside the ordinary course of business within the definition. [1]

Two Steps to Comply
A Purchaser whose transaction will qualify as a Bulk Transfer must also comply with certain notice requirements set forth by the Bulk Transfer Law. There are essentially two steps a Purchaser must take to ensure that their transaction is effective against the creditors of their Seller, which include:

  1. Schedule of property and the list of creditors
  2. Notice to creditors

Schedule of Property and List of Creditors
The preparation of the schedule of property and the list of creditors involves satisfying a number of requirements as to form and substance. The Purchaser must require that the Seller furnish a list of the Seller’s existing creditors (the “Creditor List”). The Creditor List must:

  1. Be signed and sworn to by the Seller
  2. Contain the names and business address of all creditors of the Seller with the amounts when known
  3. Contain the names of all persons who are known to the Seller to assert claims against the Seller even if the claims are disputed
  4. Contain the name and address of the clerk of the municipality in which the property was last assessed
  5. Contain the name and address of the indenture trustee and the aggregate outstanding principal amount of the issue if the Seller is the obligor of an outstanding issue of bonds, debentures or the like as to which there is an indenture trustee

It is important to note that responsibility for the completeness and accuracy of the Creditor List rests on the Seller, and the transfer is not rendered ineffective by errors or omissions therein unless the Purchaser is shown to have had knowledge of the errors or omissions.

The parties must also prepare a schedule of the property transferred sufficient to identify it (the “Property Schedule”). The Creditor List and Property Schedule must be preserved for six months following the transfer and the inspection and copying of these documents must be permitted at all reasonable hours by any creditor of the Seller. Alternatively, the Creditor List and Property Schedule may be filed with the Wisconsin Department of Financial Institutions.

Notice to Creditors
At least 10 days before the earlier of the Purchaser taking possession of the goods or paying the major part of the purchase price (the “Notice Period”) the Purchaser must give notice to the Seller’s creditors. [2] This notice (the “Creditor Notice”) must include the following information:

  1. That a Bulk Transfer is to be made
  2. The names and business addresses of the Seller and Purchaser, and all other business names and addresses used by the Seller within the past three years so far as known to the Purchaser
  3. Whether or not all the debts of the Seller are to be paid in full as they fall due as a result of the transaction and, if so, the address to which creditors should send their bills

The Purchaser should never state that the debts of the Seller will be paid in full as they fall due. Purchaser’s typically will not want to be in the position of representing to the Seller’s creditors that those creditors will all be paid only to have that statement proven incorrect by unforeseen events.

The Creditor Notice in any case must be delivered personally or sent by registered mail or certified mail to all the persons shown on the Creditor List furnished by the Seller and to all other persons who are known to the Purchaser to hold or assert claims against the Seller.

Rights and Tactics of Creditors
Unsecured creditors have an opportunity during the Notice Period to stop a Bulk Transfer. Tactics include a rush to court during the Notice Period to obtain a temporary restraining order, seek a permanent injunction; requesting that a court appoint a receiver for the Seller; or the filing of an involuntary bankruptcy petition against the Seller. [3] Given the short duration of the Notice Period these may be difficult to employ, especially for unsophisticated creditors.

Unsecured creditors may also argue that the Bulk Transfer is ineffective against them if the Seller and Purchaser do not strictly comply with the steps required by the law. [4]

The perfected security interest of a secured creditor is effective against a Purchaser. [5] Moreover, a secured creditor with an unperfected security interest will have time to file a financing statement or otherwise notify the Purchaser of the existence of the security interest, thereby rendering such a security interest effective against the Purchaser. For these reasons Purchaser’s will typically require that the Seller pay its secured creditors in full as part of the closing of the transaction. Payoff or satisfaction letters from Seller’s secured creditors which state the amount secured creditors are due as of the closing date will frequently provide Purchasers with the comfort they require.

[1] The transfers excluded from Chapter 406 generally involve: the creation of security interests; assignments for the benefit of creditors; transfers to settle liens; sales by receivers, personal representatives, trustees in bankruptcy, or other public officers under judicial process; sales made pursuant to dissolution of corporations; and transfers to transferees who will become bound to pay the transferor’s debts.
[2] This 10 day requirement is in reality a 12 day requirement: the day the notice is sent is not included and the rule does not state that possession or payment may be made on the tenth day, but that ten days must elapse between the time the notice is given and the time the transferee may take possession of the goods or pay for them. Goodyear Tire & Rubber Co. v. Tabs, Inc., 26 U.C.C. Rep. Serv. 1290 (Conn. Super. 1979); Hawkland UCC Series § 6-105:3.
[3] It should be noted that sales that otherwise comply with the Bulk Transfer Law are not necessarily insulated from fraudulent transfer laws. These laws generally provide that transfers for less than the reasonably equivalent value of the assets transferred by an insolvent debtor may be voidable by creditors of the transferor. See for example, Monastra v. Konica Business Machines, U.S.A., Inc., 43 Cal.App.4th 1628, 51 Cal.Rptr.2d 528 (Cal. App. 1996).
[4] Wis. Stat. §§ 406.104-406.107.
[5] Wis. Stat. § 409.315 and § 409.317.

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