Economy and Transportation, Distribution & Logistics

GERALD BEPKO Commentary: State's bulk-sales law should be repealed

August 8, 2005

Law is an important part of the infrastructure for our economy. It can be just as important as highspeed information networks, transportation systems or capital formation. And like all infrastructure, law has to be modernized to take account of changing conditions.

Although much law regarding commerce comes from Congress, the states have an important role through something called the Uniform Commercial Code. The UCC reflects the best contemporary thought and is uniform in that it has been enacted in all states.

To make sure the code is kept up to date, a renewal process generates proposals to the states for revisions. Like the original text of the UCC, these revisions are prepared in an open process by national committees of lawyers, judges, law professors and representatives of affected sectors of the economy.

All proposals are approved by the American Bar Association and the two organizations that sponsor the UCC-the American Law Institute and the National Conference of Commissioners on Uniform State Laws.

By adopting these revisions, our Indiana General Assembly has kept Indiana in the forefront of commercial law development. With respect to an arcane area of law called "bulk sales," however, there is still some work to do.

In the economic upheavals of the 1890s, a troublesome transaction caused the financial community to mobilize. Miscreants called "tramp merchants" would borrow money, establishing creditworthiness by their ownership of an inventory of merchandise. Because of limitations in the law of that era, it was difficult for a lender to acquire an interest in the merchandise, so these loans were without collateral. After receiving the loan proceeds, the tramp merchant would sell the merchandise "in bulk" to a goodfaith buyer, pocket the sale proceeds, and disappear to another state.

This transaction was cited by banks in lobbying for enactment of "bulk sales" laws in the states. Those laws, enacted around the beginning of the 20th century, created complex burdens on buyers in bulk, including a duty to give notice (to creditors of the seller) of the sale.

By mid-century, other laws had solved the problems of using inventory as collateral and reaching people across state lines. Nevertheless, a bulk-sales law was incorporated in the UCC as it was drafted in the 1940s. In the 1960s, the states, including Indiana, enacted Article 6 on bulk sales as part of the UCC.

By the 1980s, serious questions were raised about whether UCC Article 6 should be "deep-sixed." I chaired the ALI/NCCUSL Committee to look at Article 6. Our conclusion was that it should be repealed.

We also recognized that any law that had been on the books as long as bulk sales would have supporters who would create political obstacles to any repeal. So we drafted a modernized version for states that wanted a bulk-sales law.

Because many Hoosiers were reluctant to repeal UCC Article 6, Indiana adopted the alternative in 1997. The rest of the nation followed our primary recommendation. To date, 44 states and two territories have repealed Article 6.

Today, not only have the reasons for bulk-sales laws disappeared, but even those who like these laws acknowledge that bulk sales, which qualify for protection under the Indiana version of Article 6, are rare.

Some people say there is too much law. Our committee agreed and thought it best to repeal the bulk-sales law because it had outlived its usefulness. When this matter comes up in a forthcoming legislative session, I hope Indiana will join the mainstream and improve our legal infrastructure by repealing UCC Article 6.



Bepko is IUPUI chancellor emeritus and Indiana University trustees' professor at IUPUI. His column appears monthly. He can be reached by e-mail at gbepko@ibj.com.
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