New York Law Review

Tag: Bulk Sales

  • Harcel Liquors, Inc. v. New York State Liquor Authority, 48 N.Y.2d 503 (1979): Liability for Seller’s Unpaid Taxes in Bulk Sales

    Harcel Liquors, Inc. v. New York State Tax Commission, 48 N.Y.2d 503 (1979)

    A purchaser in a bulk sale who fails to notify the State Tax Commission of the proposed sale, as required by Tax Law § 1141(c), becomes personally liable for the seller’s unpaid sales and use taxes, regardless of any affidavit from the seller stating the business is free of debt.

    Summary

    Harcel Liquors purchased a liquor store from Evsam Parking, Inc. without notifying the New York State Tax Commission as required by law. Evsam’s president provided an affidavit stating the corporation had no debts. The Tax Commission later audited Evsam and determined it owed sales and use taxes. The Commission then notified Harcel that, as the purchaser, it was liable for Evsam’s unpaid taxes. Harcel sued, seeking a declaration that it was not liable and an injunction against the Commission collecting the taxes. The New York Court of Appeals held that Harcel was liable for the taxes because it failed to comply with the notice requirement, irrespective of the seller’s affidavit. The Court emphasized the State’s right to collect taxes and the purchaser’s ability to avoid liability by providing notice.

    Facts

    Evsam Parking, Inc. sold its liquor store to Harcel Liquors, Inc. on February 28, 1974.

    Samuel Karpoff, Evsam’s president, provided an affidavit stating the corporation was not indebted to anyone and had no creditors.

    Harcel Liquors did not notify the New York State Tax Commission of the proposed sale before taking possession of the business.

    The Tax Commission learned of the sale nine months later and audited Evsam’s books, which were in Harcel’s possession.

    The Commission determined that Evsam owed $6,216.23 in sales and use taxes for the period from February 29, 1972, to February 28, 1974.

    The Commission notified Harcel that it was liable for these back taxes under Tax Law § 1141(c).

    Procedural History

    Harcel Liquors sued the New York State Tax Commission, seeking a declaration that it was not liable for the taxes and an injunction against their collection.

    The lower courts ruled against Harcel.

    The New York Court of Appeals reviewed the case.

    Issue(s)

    Whether a purchaser in a bulk sale is liable for the seller’s unpaid sales and use taxes under Tax Law § 1141(c) when the purchaser fails to notify the State Tax Commission of the proposed sale, despite possessing an affidavit from the seller stating the business has no debts.

    Holding

    No, because Tax Law § 1141(c) unequivocally states that a purchaser who fails to give notice of the proposed sale to the tax commission becomes personally liable for the payment of the seller’s unpaid sales and use taxes, irrespective of any affidavit from the seller attesting to the lack of debt.

    Court’s Reasoning

    The court reasoned that Tax Law § 1141(c) clearly makes a purchaser who fails to notify the Tax Commission liable for the seller’s unpaid taxes. The court stated, “[T]o exempt any purchaser who has failed to comply with the clear notice requirements of this section would work to deprive the State of a means of collecting taxes duly imposed pursuant to the State’s taxing power.”

    The court rejected the argument that the seller’s affidavit absolved the purchaser of liability, emphasizing that the statutory notice requirement is paramount. The court emphasized the importance of allowing the state to collect duly owed taxes. The court stated, “[T]he State merely preserves its indisputable right to collect taxes which could otherwise be extinguished by the simple expedient of a taxpayer transferring its assets.”

    The court also noted that the statute provides adequate protection for purchasers, who can avoid liability by simply notifying the Tax Commission of the sale.

    The court concluded that Harcel’s failure to exhaust administrative remedies to challenge the tax assessment required dismissal of the complaint against the New York State Department of Taxation and Finance. Because the statute applied to Harcel, the failure to seek administrative review was fatal to their claim.

  • 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.”