In the case of a business closing or the like, the auction itself may be subject to the “bulk sale” laws in the United States.
Bulk sale laws are described in the Uniform Commercial Code (UCC) § 6. Nearly all states adopted the UCC § 6 (as revised/updated in 1989) and had the authority to modify as they deemed appropriate. More recently the UCC § 6 was repealed by many states and now these types of laws, despite them being inspired by the Uniform Commercial Code, are largely not uniform at all.
Generally speaking, bulk sales are defined as follows:
- In the case of a sale by auction or a sale or series of sales conducted by a liquidator on the seller’s behalf, a sale or series of sales not in the ordinary course of the seller’s business of more than half of the seller’s inventory, as measured by value on the date of the bulk-sale agreement, if on that date the auctioneer or liquidator has notice, or after reasonable inquiry would have had notice, that the seller will not continue to operate the same or a similar kind of business after the sale or series of sales; and
- In all other cases, a sale not in the ordinary course of the seller’s business of more than half the seller’s inventory, as measured by value on the date of the bulk-sale agreement, if on that date the buyer has notice, or after reasonable inquiry would have had notice, that the seller will not continue to operate the same or a similar kind of business after the sale.
A typical example of a bulk sale auction might be a dry cleaning store, who’s ordinarily cleaning clothes for profit, going out of business and selling at auction their presses, steamers, racking, tiered hangers, cash registers, etc.
For an auctioneer conducting an auction of this dry cleaner’s equipment and fixtures, the rules have been historically fairly straightforward; the general steps are outlined below. The first step is usually filing a affidavit concerning the bulk sale auction which includes:
- A statement that a bulk sale auction is scheduled.
- The auctioneer’s name and business address.
- The seller’s name and business address.
- A list of any other business names and addresses used by the seller during the three prior years (the auctioneer is to obtain this list from the seller.)
- A general description of the assets and their location.
- The location of the bulk sale auction.
- The anticipated date of the bulk sale auction.
- A statement whether the bulk sale auction is subject to the escrow requirements of the bulk sales law, and if so,
- The name and address of the person with whom claims must be filed and
- The last date for filing claims (one business day before the anticipated date of the bulk sale auction set forth in the notice).
Depending on the jurisdiction, the auctioneer must then:
- File this affidavit in the county recorder’s office (and/or Secretary of State’s office.)
- Possibly publish the affidavit in a newspaper of general circulation in the county where the property is located.
- Likely provide affidavit to the county tax collector.
Notice and/or filing time-frames vary by state but adequate notice is usually required. Once the auction is conducted, commissions and reasonable expenses of the sale can typically be paid to the auctioneer.
Bulk sales by auction are an efficient and profitable way to liquidate assets. As the laws vary state-to-state, these are important questions for the auctioneer to resolve prior to the auction:
- Does this particular auction qualify as a “bulk sale?”
- What specific notices or filings are required prior to or after the auction?
- Are the auction proceeds required to be escrowed? If so, in what manner?
- Are creditors required to be paid in a definite priority order?
- Is there a formula for calculating amounts payable to creditors?
- What potential liability do auctioneers and/or auction buyers have for creditor claims?
- Are creditors granted a period of time to file claims after the auction?
Auctioneers are advised to find an attorney in their particular state who is familiar with that state’s bulk sale laws as well as customary practice. Too, having an attorney involved can help mitigate risk of liability.
More information can be found here http://www.law.cornell.edu/ucc/6 considering that nearly all states have repealed their “Article 6” and/or essentially customized this code. Too, other state statutes may likely apply.
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. He serves as Adjunct Faculty at Hondros College of Business, Executive Director of The Ohio Auction School and Faculty at the Certified Auctioneers Institute held at Indiana University.