Key Takeaways

  • The bulk transfer law protects creditors when a business sells its assets, but compliance is often burdensome.
  • Buyers and sellers frequently agree to waive compliance, but buyers must negotiate protections like escrow or indemnification.
  • Even if waived, buyers may still face successor liability for taxes, employee claims, or environmental obligations.
  • Several states have repealed or modified bulk transfer laws, but buyers should still be cautious with creditor claims.
  • Boilerplate waiver clauses should not be treated casually; they carry real financial risks if not carefully reviewed.

If your buying or selling a business, or helping a client buy or sell a business, you will likely be faced with a provision requiring you to comply with or waive compliance with the bulk transfer law. Should you comply or should you waive compliance? Well, it depends...

WHAT IS THE BULK TRANSFER LAW?

The bulk transfer law is a law to protect business creditors. It provides that if a buyer of a business notifies the creditors of the seller in advance that it is buying the seller's assets, then the buyer will not be liable to those creditors for the debts and obligations of the seller. If, however, a buyer does not comply with the bulk transfer law, then it is responsible to the seller's creditors after the purchase is consummated. If you are a buyer, it would seem always to make sense to comply with the bulk transfer law. Correct? Not necessarily.

State Adoption and Repeal of Bulk Transfer Laws

While the Uniform Commercial Code originally included bulk transfer provisions, many states have since repealed or modified these requirements. Legislators recognized that the process was costly and often ineffective in protecting creditors. For example, some states shifted to requiring direct tax clearance certificates instead of compliance with bulk transfer statutes. Because rules vary significantly, buyers should always confirm whether the jurisdiction where the sale occurs still enforces the bulk transfer law, and if so, whether compliance is mandatory or can be waived.

HOW TO COMPLY

Compliance with the bulk transfer law is tedious:

* The parties must first determine whether the transaction is subject to the bulk transfer law. Generally, a sale of assets is subject to the law but there are exceptions. For example, if the buyer assumes the debts of seller the bulk transfer law is inapplicable because the creditor has a responsible party to look to for collection.

* The seller must prepare a list of creditors.

* The seller and buyer must prepare a schedule of the property to be transferred to the buyer.

* The buyer must notify the seller's creditors at least ten days prior to the transfer. The notice must comply with statutory requirements.

* The buyer must file the list of creditors and the schedule of property transferred with the County Recorder.

Rather than go through the time and expense of compliance with the bulk transfer law, buyers and sellers frequently agree to waive compliance. However, buyers will demand some protection from the seller, if it agrees to waive.

Common Situations Where Waivers Are Used

In practice, most asset purchase agreements now include a waiver of the bulk transfer law. Parties choose waiver when:

  • The seller is a reputable company with limited debt exposure.
  • The buyer has conducted due diligence and is comfortable assuming some risk.
  • The timeline of the transaction does not allow for the 10-day statutory notice period.
  • The cost of preparing creditor lists and filing schedules outweighs potential benefits.

However, waiving compliance does not eliminate all liability. Buyers should carefully weigh whether waiving is a cost-saving measure or a hidden trap.

HOW BUYERS PROTECT THEMSELVES

The best way to protect the buyer from liability for the seller's creditors is to hold part of the purchase price in escrow for some period of time. How much to hold in escrow can only be determined, however, after the seller has disclosed information regarding its outstanding debts and obligations. The prudent buyer will want the seller to represent that the seller's disclosures are accurate and complete.

The buyer may also want the seller to indemnify it from any future claims of the seller's creditors. However, indemnifications are only worthwhile if the seller has assets and will be remaining in existence following the sale of its assets.

Additional Buyer Protections Beyond Escrow

In addition to escrow and indemnification, buyers may consider other strategies, such as:

  • Requiring Seller Representations and Warranties: Detailed statements about outstanding debts, taxes, and pending litigation.
  • Insurance Coverage: Some buyers purchase transactional risk insurance to protect against undisclosed liabilities.
  • Holdbacks: Retaining part of the purchase price for a set period to cover unexpected claims.
  • Seller Solvency Review: Confirming whether the seller will continue in business or dissolve immediately after closing, as a dissolved seller cannot honor indemnity promises.

These protections create multiple layers of security when compliance with bulk transfer law is waived.

OTHER TRAPS FOR THE BUYER

Even if a buyer complies with the bulk transfer law, it may still be responsible for certain debts of the seller. For example, the buyer will be liable for any unpaid sales tax and withholding tax obligations of the seller (including interest and penalties) that were accrued and unpaid at the time the assets were transferred. The only way for the buyer to protect itself from liability is to withhold a sufficient amount of the purchase price to pay the taxes.

Additionally, compliance with bulk transfer law does not protect the buyer from liability for any taxes owed by the seller to the County Treasurer. Only a certificate in a form prescribed by the Tax Commissioner can do that. There may be other liabilities, such as tort liabilities, that become the responsibility of the buyer under a successor liability theory. And in the case of real estate, don't forget about possible successor liability for environmental problems.

Successor Liability Risks After Waiver

Even with waivers, buyers may face successor liability under other legal theories. Courts may impose liability for:

  • Unpaid wages or employee benefit claims.
  • Tort liabilities arising from defective products sold before the transfer.
  • Environmental clean-up obligations tied to the business’s real estate.
  • Unpaid franchise or excise taxes.

Because these liabilities can surface years after closing, waiving the bulk transfer law should never be done without a thorough risk assessment.

BE WARY OF "BULK" BOILERPLATE

Don't be fooled into thinking that provisions regarding compliance with the bulk transfer law are meaningless boilerplate. Unanticipated assumption of seller liabilities can make an attractive business deal a financial nightmare.

Drafting and Negotiating Waiver Clauses

Waiver language in contracts should be customized, not treated as filler text. A poorly drafted waiver can inadvertently shift excessive liability to the buyer. Buyers should negotiate provisions that:

  • State clearly that the waiver does not extend to undisclosed debts or fraud.
  • Require the seller to provide accurate disclosure schedules.
  • Include remedies for breach, such as reimbursement or indemnity.
  • Specify any survival period for indemnification obligations.

Because “bulk” boilerplate may appear harmless but carry significant financial impact, professional legal review is essential.

Frequently Asked Questions

  1. What does waiving the bulk transfer law mean?
    It means the buyer and seller agree not to follow statutory notice and filing requirements designed to protect creditors, shifting risk back to the buyer.
  2. Is waiving always risky for the buyer?
    Not always. If the seller is solvent and creditor risks are low, waiver can speed up closing. But hidden liabilities can still create exposure.
  3. Do all states still enforce the bulk transfer law?
    No. Many states have repealed it, but others still enforce compliance. Buyers must confirm the law’s status in their jurisdiction.
  4. Can buyers protect themselves if they waive compliance?
    Yes. Buyers can use escrow, indemnification, holdbacks, and insurance to mitigate risks.
  5. Should waiver provisions be reviewed by an attorney?
    Absolutely. Waiver clauses must be tailored to the transaction to avoid inadvertently assuming seller liabilities.

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