New York Law Review

Tag: Adrian Tabin Corp. v. Climax Boutique

  • Adrian Tabin Corp. v. Climax Boutique, Inc., 34 N.Y.2d 210 (1974): Transferee’s Duty of Inquiry in Bulk Sales

    Adrian Tabin Corp. v. Climax Boutique, Inc., 34 N.Y.2d 210 (1974)

    Under UCC Article 6 (Bulk Transfers), a transferee who lacks actual knowledge of the transferor’s creditors may rely on an affidavit of no creditors furnished by the transferor and has no duty to make a careful inquiry.

    Summary

    Adrian Tabin Corp., a creditor of L.D.J. Dress, Inc., sued Climax Boutique, Inc., the transferee of L.D.J.’s business, alleging the bulk sale was ineffective because Climax failed to notify Adrian Tabin as a creditor. L.D.J. provided Climax with a bill of sale and an affidavit stating it had no creditors. Climax’s attorney also performed a lien search and was assured by L.D.J.’s attorney that no creditors existed. The New York Court of Appeals held that under UCC § 6-104, a transferee without actual knowledge of the transferor’s creditors can rely on the affidavit of no creditors, and the UCC imposes no duty of careful inquiry.

    Facts

    L.D.J. Dress, Inc. sold its business to Paul Warman, who then resold it to Climax Boutique, Inc.
    At the closing, L.D.J. furnished a bill of sale with a schedule of property and an affidavit stating the business was free of all claims and that L.D.J. had no creditors.
    Climax’s attorney conducted a lien search that revealed no liens and inquired about creditors, receiving assurances from L.D.J.’s attorney that none existed.
    Adrian Tabin Corp., a creditor of L.D.J., was not notified of the sale.

    Procedural History

    The trial court voided the sale, holding that Climax had a duty to inquire carefully about creditors.
    The Appellate Division reversed, finding that Climax could rely on the affidavit of no creditors and had no duty to make a careful inquiry.
    The New York Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether a transferee of a bulk sale, who lacks knowledge of the transferor’s creditors, may rely on an affidavit of no creditors furnished by the transferor, or whether the Uniform Commercial Code imposes a duty of careful inquiry as existed under former law.

    Holding

    No, because the transferee of a bulk sale who has no actual knowledge of creditors of the transferor may rely on an affidavit of no creditors furnished by the transferor, and the Uniform Commercial Code imposes no duty of careful inquiry as existed under former law.

    Court’s Reasoning

    The court focused on the language of UCC § 6-104(1), which requires the transferee to obtain a list of creditors from the transferor and preserve it, and § 6-104(3), which places responsibility for the list’s accuracy on the transferor.
    The court emphasized that “knowledge,” as defined in UCC § 1-201(25), means actual knowledge, not constructive knowledge.
    The court acknowledged prior New York law (Personal Property Law § 44) required careful inquiry before a transferee could rely on an affidavit of no creditors, but found this requirement absent from the face of UCC § 6-104.
    The court reasoned that while a careful inquiry requirement might protect creditors, it could also restrain the free alienation of property. The court noted, “the desirability of allowing transfers to go forward outweighs the value of protecting the omitted creditor.”
    The court cited cases from New Jersey that support the view that actual knowledge is required to render a bulk transfer ineffective.
    The court pointed out that omitted creditors are not entirely without remedy, as the Uniform Fraudulent Conveyance Act (Debtor and Creditor Law § 270 et seq.) allows recovery from a transferee who knowingly participates in a conveyance made with intent to defraud creditors. The court also noted that preferential transfers could lead to bankruptcy proceedings.
    The court highlighted optional UCC § 6-106, which New York has not adopted, that provides additional protection for omitted creditors by obligating the transferee to apply the transfer proceeds to the transferor’s debts. The court observed that adoption of 6-106 would furnish additional protection for unsecured creditors.
    The court concluded that despite strong policy reasons for imposing a duty of careful inquiry, the plain language of UCC § 6-104 and the definition of knowledge preclude such a construction. The court explicitly stated that “the simple and unambiguous language of section 6-104 and the precise and careful definition of knowledge as used in the code (§ 1-201, subd. [25]) preclude such a construction.”