Court Opinion

ID: 8892603
Source: CourtListenerOpinion
Date Created: 2022-11-26 23:26:54.783842+00
Date Added: 2024-06-11T17:07:17.804504
License: Public Domain

ARNOLD, Chief Judge.
This dispute concerns the applicability of the bulk transfer provisions in Article 6 of the Uniform Commercial Code. A bulk transfer is “any transfer in bulk and not in the ordinary course of the transferor’s business of a major part of the materials, supplies, merchandise or other inventory ... of an enterprise subject to [Article 6].” N.C. Gen. Stat. § 25-6-102(1) (1986). A transfer of a substantial part of an enterprise’s equipment is also a bulk transfer if the equipment is sold in connection with a bulk transfer of inventory. G.S. § 25-6-102(2). A business is subject to Article 6 if its principal business is the sale of merchandise from stock. This includes businesses that manufacture what they sell. G.S. § 25-6-102(3).
A bulk transfer subject to Article 6 must be conducted according to the requirements of that article, which imposes certain obligations on the transferee and transferor. The transferee must demand, and the transferor must provide, a list of the transferor’s creditors and any persons who are known to assert claims against the transferor. G.S. § 25-6-104(l)-(2). The transferee must preserve the list and make it available to any of the transferor’s creditors. The parties must also prepare a schedule of the property transferred. G.S. § 25-6-104(1). In addition, the transferee must give notice of the sale to creditors at least ten days before the transferee takes possession of or pays for the goods. G.S. § 25-6-105. A bulk transfer is ineffective against the transferor’s creditors unless the parties involved in the transfer observe each of these requirements. G.S. § 25-6-104 to -105.
There are, however, certain exemptions from Article 6. At issue here is the exemption in G.S. § 25-6-103(3) which provides that “[transfers in settlement or realization of a lien or other *651security interest” are not subject to Article 6. The parties do not dispute that DKLS was an enterprise subject to Article 6, or that the sale of inventory and equipment constituted a bulk transfer. The question is whether or not this transfer was exempt from the Article 6 notice requirement because all of the proceeds were remitted to NCNB, which held a security interest in all of DKLS’s assets.
Plaintiff argues that 25-6-103(3) does not exempt this transfer because there was no default on the NCNB obligation. We agree. The consensus appears to be that under the Uniform Commercial Code default is a prerequisite for settlement or realization of a security interest:
Transfers in settlement refer to a secured party’s election to accept collateral in discharge of a secured obligation under 9-505. Transfers in realization refer to transfers by a secured party in foreclosure of a security interest under 9-504. In order for a transfer to be exempt under 6-103(3), there must be evidence of a default by the debtor. For without default, there can be neither a settlement nor a realization.
James J. White & Robert S. Summers, Uniform Commercial Code § 20-2 (3d ed. 1988) (footnotes omitted).
In the few cases that have addressed this issue, a common requirement for exemption by § 6-103(3) is that the transferor must be in default. See Stone’s Pharmacy Inc. v. Pharmacy Accounting Management Inc., 812 F.2d 1063 (8th Cir. 1987). See also Hixson v. Pride of Texas Distrib. Co., 683 S.W.2d 173 (Tex. Ct. App. 1985) and Starman v. John Wolfe, Inc., 490 S.W.2d 377 (Mo. Ct. App. 1973). We agree with the reasoning in these cases, and we therefore hold that the transferor in a bulk transfer must be in default before G.S. § 25-6-103(3) will exempt the transfer from the requirements of Article 6.
The trial court’s order dismissing plaintiff’s claim is
Reversed.
Judges WYNN and MARTIN concur.