The general rule is that a purchaser of a business is not liable for seller’s legal obligations unless those obligations are expressly assumed by the purchaser in the purchase contract. However, there are numerous state laws that create successor liability for the purchaser of a business. The bulk sales statute is one such example. While most states have repealed their bulk sales statutes, in some states across the U.S., such as California, Delaware, Illinois, New Jersey and Pennsylvania, the practice of bulk sales compliance remains alive and well. The purpose of this article is to provide some clarity concerning compliance with the bulk sales statutes.
The term “bulk sale” refers to the transfer or sale of majority of business assets outside of the ordinary course of business. Depending on the state’s drafting of the bulk sale law and the scope of the transaction, compliance with the bulk sales statute may be necessary not only for sale of business personal property but also real estate.
The intended purpose of a bulk sale statute is two-fold: (1) to prevent the seller of the business from transferring the business assets to the purchaser without paying-off its creditors; and (2) to ensure that seller pays all of its tax liabilities that may be owed to the state’s taxing authorities prior to or in connection with the sale of the business. Indeed, if the sale of the business occurs within the jurisdiction of the state that still implements the bulk sale law, and the purchaser fails or otherwise neglects to comply with the bulk sale requirements, then the purchaser may be liable to seller’s creditors, including state taxing authorities, to pay the seller’s outstanding debts to the extent of the monetary consideration paid by the purchaser to the seller.
The bulk sale compliance process is usually accomplished through an attorney or licensed escrow officer who is facilitating the transaction. In most cases, when a transaction is a bulk sale, the creditors and/or the state taxing authorities must be given proper notice to submit their claims for any outstanding debt that may be owed by the seller. In some cases, the bulk sales law requires the purchase price to be put into an escrow to accomplish this purpose. Moreover, some states have additional requirements to comply with their bulk sales statute and necessitate for the bulk sales notice to be recorded with the Office of the County Clerk where the business is located or published in a local newspaper, or both.
It is important to note that failure to comply with the bulk sale statute does not technically release the seller from responsibility to pay its debt, but failure or neglect to comply with the same subjects the purchaser to potential liability to any creditor of the seller in an amount equal to what the creditor would have realized had he been given the opportunity to file a claim pursuant to a proper notice. Since the bulk sale laws vary from state to state, it is important to check the law in the state where the seller is located since failure to follow the provisions of the state’s bulk sale law can be costly and may result in future disputes and unexpected obligations for the purchaser of the business. For further assistance please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070 or email us at info@starfieldsmith.com.
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