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Buyer of Business Beware

Lerch Early Legal Update

Many business people may be surprised at the story that follows, but it illustrates the need for buyers to be extremely careful when acquiring the assets of another business in Maryland. Business A was anxious to sell, and Business B was anxious to buy the assets of Business A. The transaction was not large, and both parties were content to enter into a short, simple agreement. The resulting transaction was quick and friendly. Business A transferred substantially all of its assets to Business B, and Business B paid Business A in one lump sum. The parties’ agreement specifically stated that Business B was not assuming any of Business A’s liabilities. Business B formed a new company to acquire the assets of Business A, and changed the name of the business immediately after the transaction.

After closing, Business B was contacted by several creditors of Business A, which apparently failed to pay some, if not most, of its outstanding debts. Business B expressed its sympathy for the unpaid creditors, but confidently informed them that it was a new owner and not responsible for any of Business A’s debts. Shortly thereafter, however, to the complete surprise of Business B, Business B became embroiled in litigation filed by Business A’s creditors. To Business B’s further amazement, Business B soon discovered that the assets it purchased were subject to levy by the creditors in satisfaction of their claims against Business A. Business A and Business B had failed to comply with the Maryland Bulk Sales law.

Article 6 of the Uniform Commercial Code as enacted in Maryland, otherwise known as the Bulk Sales law, is intended to protect creditors of certain businesses, when those businesses sell their assets in a “bulk sale,” as in the transaction described above. Only businesses that sell merchandise from stock, such as retailers, wholesalers, and manufacturers, are covered by the Bulk Sales law. Service businesses generally are not covered, unless they also sell goods along with their services. Although some states have abolished their versions of similar laws, the Bulk Sales law remains in effect in Maryland. Furthermore, the Maryland version contains some of the most stringent provisions, intended to protect the interests of a company’s creditors.

Under Bulk Sales Law, Buyer Responsible for Creditor Payment

If the Bulk Sales law applies, the buyer of substantially all of the assets of a business must notify each of the seller’s creditors that a sale in bulk of the assets of the seller is about to occur. Furthermore, the buyer is responsible for ensuring that the creditors are paid from the purchase price, i.e., the buyer cannot rely on the seller’s promise to pay its own creditors. If there is a concern that the seller’s creditors will not be paid, the buyer must insist that the purchase price be disbursed directly to the creditors. If the buyer fails to notify the creditors as required, then the seller’s creditors are able to look to the purchased assets to satisfy their claims. If the buyer notifies the creditors, but fails to ensure that they are paid from the purchase price, the buyer may also be in jeopardy, because claims may be filed directly against the buyer in some circumstances.

If the purchase price is insufficient to pay all the creditors, then the buyer must take action to ensure the money is disbursed pro rata to the creditors, or the buyer can pay the money into court and ask the court to determine how the purchase price will be divided among the creditors. Provided that the buyer notifies the creditors of the impending sale from a list provided by the seller (upon which the buyer is usually entitled to rely, unless the buyer knows the list is incomplete or inaccurate), and those creditors are paid in full, the buyer would ordinarily be protected from claims that arise later from creditors whose names did not appear on the seller’s list. Furthermore, claims under the Bulk Sales law must generally be brought within six months of the bulk sale, otherwise they are barred.

Many people fail to comply with the Bulk Sales law, or waive compliance, because complying often can be inconvenient and costly. Waiving compliance may be reasonable, although not without some risk, if the seller is known to have sufficient assets, and it is unlikely that the seller will fail to pay its creditors. Also, in some transactions, the seller is not paid in full immediately, and there is sufficient security to protect the buyer in the event the seller defaults on its obligations to pay its creditors. However, in the situation described at the beginning of this article (which is based on a true story), the buyer failed to comply, the seller was insolvent, and there was no security that the buyer could rely on to recover its loss from the seller. The buyer learned a very expensive lesson.

Ted Goldstock is a business and litigation attorney who counsels businesses on a broad range of corporate and commercial law matters and represents clients in business-related disputes and litigation. For more information about Bulk Sales, contact Ted at (301) 347-1274 or trgoldstock@lerchearly.com.

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This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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