Risk Management Blog

On occasion questions come from the escrow community on certain situations that escrow agents find themselves in, involving the transfer of business assets and navigating through the CA UCC Code, under Division 6, Bulk Sale.

The questions come in various forms, typically involving a business asset sale and transfer through escrow.  The transactions can involve business assets only or business assets with a Liquor License, but the scenario is always similar to the situation below:

“My Seller/Landlord has taken over a laundromat business and all assets in his commercial building for non-payment of rent by business owner and has continued to operate the business for 6 months.  At the time of possession the Seller/Landlord did not process the transfer of assets through UCC Division 6, Bulk Sale Code.  My Seller and new Buyer have entered into a sale/purchase agreement and have opened escrow to complete the transfer of assets under UCC Division 6, Bulk Sale Code.  Should I as Escrow Agent be concerned about the previous Seller’s existing liens and conduct a UCC Lien Search as an added precaution for the Buyer?”

As a good business practice and procedure for your escrow or title company, in handling personal property escrows, industry professionals suggest that you should always error on the side of caution and be transparent with your Buyers and Sellers in explaining the potential liabilities and risks of not taking their sale through the requirements of a bulk sale escrow.  Granted there may be occasions where bulk sale escrow may not be necessary and the best advice is to always suggest that clients seek legal counsel if they have questions of a legal nature.

For purposes of this blog, there are some red flags that should trigger when you run into these types of escrow situations to protect yourself as the escrow agent:

1. If your current Seller took possession of the business, its assets and maybe a liquor license, what process did they go through to obtain the assets and can they provide documentation that the assets are free and clear of all past Seller(s) debts?
2. If the current Seller cannot provide proper documentation to show that all debt of their previous Sellers was cleared at the time of their possession of the business and its assets, there may be lingering liabilities out there that can affect your escrow transaction from a creditor company or taxing agency.

The escrow agent should conduct a thorough UCC and Tax Lien Search on all Sellers’ names of record for the past 3 years prior to possession by the current Seller to provide a level of comfort to your Buyer to potential liabilities and items to be cleared through your escrow.

Asking enough of the right questions will help determine for the escrow agent how they should proceed through the escrow to properly identify potential liabilities and ultimately protect the Buyer, and help clean up the business accounts of the Seller.

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