NOTE: The following article is from the collection of articles in our Automobile Dealership Buy/Sell Newsletters. The newsletter deals with the complex area of buying and selling automobile dealerships. Some of the material may not be up to date because of changes in the law from the date shown at the end of the article. This article is not to be taken as legal, accounting, tax, or other advice. You should consult your own professionals for such advice and for any updating of the information provided.
Buyers of assets can be liable to a seller’s creditors when bulk sale laws are not followed. There are not a lot of court rulings in California interpreting the bulk sale statutes, but during 1997 a California Court of Appeal had occasion to rule on a question not previously considered by California Courts.
An individual named Gifford sold produce on credit to a company called Salad Works. Salad Works sold all of its assets to J & A Holdings for $85,000. California bulk sale laws require that in a sale of a business’s inventory under $2 million, a notice of the sale (the “bulk sale notice”) be recorded with the County Recorder and published in a newspaper at least 12 business days in advance of the sale. The notice must, among other matters, state the anticipated date of the closing of the sale. If the purchase price is under $2 million, the notice must also notify creditors of their right to file claims against the sale proceeds. It must also state the name and address of the person with whom claims may be filed and the last date for filing claims, which is the business day before the date described in the notice as the anticipated date of the bulk sale.
J & A published its bulk sale notice in a newspaper on September 23 and the notice was recorded with the County Recorder on October 4. The notice stated that the anticipated sale date was October 15 and called for claims to be filed by October 14. Thus, the newspaper publication was timely, but the recording with the County Recorder was not because there were less than 12 business days between October 4 and October 15. The parties thought there was an easy way to resolve the problem-simply extend the closing date past October 15 until October 21, which they did.
The escrow closed on October 21 and Gifford never filed a claim for the amount owing to him. After closing, Gifford claimed that the buyer, J & A, owed him $72,000 because the recording with the County Recorder was not done 12 days ahead of the closing date.
The Court of Appeal agreed with Gifford and ordered J & A to pay Salad Works $72,000. One of the facts discussed by the Court was that Gifford subscribed to a service called McCord’s Daily Notification Sheet, which provides daily notices to clients of notices of intended bulk transfers which have been recorded. The Court reasoned that if the recording had been done in a timely manner, Gifford might have received his McCord notice earlier and been able to have filed a timely claim. The Court’s Conclusion, however, did not rely on this fact in its interpretation of the bulk sale statutes involved. Rather, the Court said that the purpose of the bulk sale laws are to give creditors an opportunity to recover claims out of escrow proceeds. When the law is not complied with, the buyer must pay at least the amount the creditor would have received out of the escrow if proper notices had been given.
How should this case have been handled? The Court said that there should have been a new newspaper publication and a new notice recorded with the County Recorder, with a new closing date which would satisfy the 12 business day rule. The practical problem is that sometimes 12 days can mean up to 3 weeks or more because of newspaper publication and deadline schedules. Parties anxious to close an escrow often find a three week extension unacceptable, particularly in dealership buy-sells where asset and parts inventories have been taken, factory approval obtained, arrangements made for inventory flooring transfers, and the DMV scheduled to come out for issuance of the new dealer’s license. It is consequently necessary that in auto dealership buy-sell planning be done at an early stage so that the publication and recording of the bulk sale notice is done in sufficient time ahead of the closing.
Sometimes parties also close buy-sell transactions without a formal escrow, and the closing occurs at the dealership. In these cases, the bulk sale notice will normally list the attorney for the buyer as the one with whom to file claims.
For those who may be interested in reading the case, the citation is Gifford v. J & A Holdings (1997) 63 Cal. Rptr. 2d 253.
This article was written in 1998.