California Commercial Code – Buyer’s Failure To Comply With Requirements

As a business law firm in Orange County California, we believe it is important to keep our small business clients up to date with the latest California Codes that apply to their small business corporations.

California Commercial Code Section 6107 describes the effect of the buyer’s failure to comply with requirements of the California Bulk Sales Law and the Sellers Burden of establishing validity and amount of claim.

California Commercial Code Section 1607

California Commercial Code – 6107. (a) Except as provided in subdivision (c), and subject to the limitation in subdivision (d), a buyer who fails to comply with the requirements of Section 6104 with respect to a claimant is liable to the claimant for damages in the amount of the claim, reduced by any amount that the claimant would not have realized if the buyer had complied.

(b) In an action under subdivision (a), the claimant has the burden of establishing the validity and amount of the claim, and the buyer has the burden of establishing the amount that the claimant would not have realized if the buyer had complied.

(c) A buyer who made good faith and commercially reasonable effort to comply with the requirements of Section 6104 or to exclude the sale from the application of this division under subdivision (c) of Section 6103 is not liable to creditors for failure to comply with the requirements of Section 6104. The buyer has the burden of establishing the good faith and commercial reasonableness of the effort.

(d) In a single bulk sale the cumulative liability of the buyer for failure to comply with the requirements of Section 6104 may not exceed an amount equal to any of the following:

(1) If the assets consist only of inventory and equipment, twice the net contract price, less the amount of any part of the net contract price paid to or applied for the benefit of the seller or a creditor except to the extent that the payment or application is applied to a debt which is secured by the assets and which has been taken into consideration in determining the net contract price.

(2) If the assets include property other than inventory and equipment, twice the net value of the inventory and equipment less the amount of the portion of any part of the net contract price paid to or applied for the benefit of the seller or a creditor which is allocable to the inventory and equipment except to the extent that the payment or application is applied to a debt which is secured by the assets and which has been taken into consideration in determining the net contract price.

(e) For the purposes of paragraph (2) of subdivision (d), the “net value” of an asset is the value of the asset less each of the following:

(1) The amount of any proceeds of the sale of an asset, to the extent the proceeds are applied in partial or total satisfaction of a debt secured by the asset.

(2) The amount of any debt to the extent it is secured by a security interest or lien that is enforceable against the asset before and after it has been sold to a buyer. If a debt is secured by an asset and other property of the seller, the amount of the debt secured by a security interest or lien that is enforceable against the asset is determined by multiplying the debt by a fraction, the numerator of which is the value of the asset on the date of the bulk sale and the denominator of which is the value of all property securing the debt on the date of the bulk sale. The portion of a part of the net contract price paid to or applied for the benefit of the seller or a creditor that is “allocable to the inventory and equipment” is the portion that bears the same ratio to that part of the net contract price as the net value of the inventory and equipment bears to the net value of all of the assets.

(f) A payment made by the buyer to a person to whom the buyer is, or believes it is, liable under subdivision (a) reduces pro tanto the buyer’s cumulative liability under subdivision (d).

(g) No action may be brought under subdivision (a) by or on behalf of a claimant whose claim is unliquidated or contingent.

(h) A buyer’s failure to comply with the requirements of Section 6104 does not do any of the following:

(1) Impair the buyer’s rights in or title to the assets.

(2) Render the sale ineffective, void, or voidable.

(3) Entitle a creditor to more than a single satisfaction of its claim.

(4) Create liability other than as provided in this division.

(i) Payment of the buyer’s liability under subdivision (a) discharges pro tanto the seller’s debt to the creditor.

(j) Unless otherwise agreed, a buyer has an immediate right of reimbursement from the seller for any amount paid to a creditor in partial or total satisfaction of the buyer’s liability under subdivision (a).

What if I need help understanding California Commercial Code Section 1607?

It is important to understand that failure to follow the rules can result in a buyer of assets of a business suffering severe penalties for not doing things correctly.

If you are not sure how this law may apply to you, please call the Business Lawyers in Orange County at 714-634-4838.