chapter 15. bulk sales law

SALES REVIEWER (2013-‐2014) ATTY. RAY PAOLO SANTIAGO

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED: MAY 21, 2014)

CHAPTER 15: BULK SALES LAW (ACT NO. 3952)

I. Scope (Chin v. Uy, 40 O.G. 4 Supp. 52)

Chin v. Uy Doctrine: A sale made of all the effects in the vendor's store without the buyer being furnished a sworn list of creditors as required by Sec 3, is null and void irrespective of the good or bad faith of the buyer, and judgment creditors may treat such sale as never having been made and proceed to have execution levied on the properties thus sold. I. Transactions covered by the law

• Intended as a species of bankruptcy law to protect supply creditors/businessmen against preferential/fraudulent transfers done by merchants

• Intended to prevent a situation where merchants would sell their businesses then vanish, leaving their creditors without recourse against the “buyers in good faith and for value.”

• Law covers all transactions, good faith or not, that are within the description of a “bulk sale”

• Primary Objective is to compel seller in bulk to: o Execute and deliver a verified list of creditors to the

buyer o Give notice of the intended sale to the creditors o Use the proceeds to pay outstanding liabilities

• This is considered as being a valid exercise of the State’s police power. Liwanag v. Menghraj, 72 Phil. 410

• The Bulk Sales Law must be construed strictly. Thus, the disposal by the owner of a foundry shop of all his iron bars and others does not fall under the law, because the contents of a foundry shop are not wares and merchandise. The Law only covers sales in bulk of fixtures and equipment used in the mercantile business, which involves the buying and selling of merchandise. xPeople v. Wong, [CA] 50 O.G. 4867 (1954).

• The Law applies to merchants who are in the business of selling goods and wares and similar merchandise, and cannot cover the sale of assets by a manufacturer since the nature of his business does not partake of merchandise. DBP v. The Honorable Judge of the RTC of Manila, 86 O.G. No. 6 1137 (05 February 1990).

Development Bank of the Philippines v. RTC of Manila

Facts: In 1978, Pioneer Glass Manufacturing Corp.purchased from Yu (under Ancar Equipment Parts and Tonicar) equipment parts worth P7,000. However, Pioneer failed or refused to pay upon demand. Without informing Yu, Pioneer Glass transferred all its assets to DBP in a "deed of cession of property in payment of obligation" or dacion en pago. In turn, DBP sold these assets to Union Glass that same year. In 1983, Yu instituted an action against Pioneer Glass, DBP, and Union Glass, asserting that the transfer of the assets to DBP was void by reason of fraud. Issue: Whether or not the Bulk Sales Law covers the conveyance in question (its violation would make DBP, Union Glass, and Pioneer Glass



liable to Yu) Held: NO. Under the Bulk Sales Law, the terms "goods" and "merchandise," having acquired a fixed meaning, refer to things and articles, which are kept for sale by a merchant. Likewise, the term "fixtures" has been interpreted to mean the chattels, which the merchants usually possess and annex to the premises occupied by them in order to store, handle and display their goods and wares. The technicality of these terms conveys the intention of the law to apply it to merchants who are in the business of selling goods and wares and similar merchandise. In this case, Pioneer Glass manufactured glass only on specific orders and it did not sell directly to consumers but manufactured its products only for particular clients. Thus, Pioneer Glass was NOT a merchandiser. Moreover, the dacion en pago between Pioneer and DBP transferred and conveyed the bulk of its corporate assets to extinguish its outstanding debts to DBP. Thus, the subject matter of the deed of cession was the assets, not stock-‐in-‐trade. Such conveyance was clearly outside the ambit of the Bulk Sales Law. SC ordered Pioneer Glass, not DBP and Union Glass, to pay Yu the price of the equipment purchased plus interest. Doctrine: II. Coverage of “Bulk Sale” – Sale, transfer, mortgage or assignment of: ACT NO. 3952 Section 2. Sale and transfer in bulk.

Any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor, or assignor, or sale, transfer, mortgage or assignment of all, or substantially all, of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor, or of all, or substantially all, of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor, or assignor, shall be deemed to be a sale and transfer in bulk, in contemplation of this Act: Provided, however, That if such vendor, mortgagor, transferor or assignor, produces and delivers a written waiver of the provisions of this Act from his creditors as shown by verified statements, then, and in that case, the provisions of this section shall not apply.

• Three Types of Transaction 1. Extraordinary Sale Of Goods (Yellow) ! Goods, wares,

merchandise, provisions or material other than in the ordinary course of business.

2. Extraordinary Sale Of Fixtures And Equipment (Pink) ! All, or substantially all of all or substantially all of the fixtures and equipment used in and about the business.

3. Sale Of Business Enterprise (Green) ! All, or substantially all of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor.

• Motive/intention/consequence of sale is not an element o As long as the transaction is within the description, no

matter what it’s being done for, it is covered by the Bulk Sales Law.



• Qualification of “in the normal course of business” applies only to the first type

o Second two types are by nature not in the normal course of business.

• Bulk sales are of a nature that they do not fall within the normal course, which thus should warn parties to such transactions

A. “Bulk Sales” Not Covered By Law

• Some exceptions: even if transaction comes within Section 2, Bulk Sales Law does not apply to these cases:

1. Seller produces and delivers a written waiver of the provisions of the Law from his creditors as shown by verified statements; and

2. Transactions effected by executors, administrators, receivers, assignees in insolvency, or public officers, acting under legal process.

B. “Business” Covered by the Law

• People v. Wong, 50 O.G. 4876 o Bulk sales law should be construed strictly against the

State and in favor of the accused. o In this case, accused was held liable for selling his

foundry shop, along with all other assets. The Supreme Court held that the Bulk Sales Law contemplates sale of merchandise, stock, and goods – not the sale of the whole shop with the equipment, credits, etc. As such, a foundry shop which does not sell merchandise is not included.

• Meaning of merchandise and Stock

o Merchandise ! something sold everyday, going in and out of the store, replaced by other goods – things usually bought and sold in trade by merchants

o Stock ! those goods kept for sale. • Development Bank of the Philippines v. RTC of Manila, 86 O.G.,

No. 6, 1137 (05 February 1990) reiterated the Wong ruling regarding applicability to bulk sales not involving merchandise and stock.

• Thus – enumeration in the first type of bulk sales: only covers those sold in the normal course of business.

o Wong: “sale of fixtures and equipment” excludes materials used in the process of production.

• However, Wong and DPB rulings seem only to interpret the first type

o When it comes to the other two types, law does not limit the coverage to a particular type of business.

o We do not consider the Wong and DBP rulings when it comes to the other two types of Bulk sales

III. Obligations of Seller/Encumbrancer When Transaction is a Bulk Sale

1. To Deliver a Sworn Statement of Listing of Creditors (Section 3) – Before receiving from the vendee, mortgagee, or his, or its agent or representative any part of the purchase price thereof, or any promissory note, memorandum, or other evidence therefor, to deliver to such vendee, mortgagee, or agent, or if the vendee, mortgagee, or agent be a corporation, then to the president, vice-‐president, treasurer, secretary or manager of



said corporation, or, if such vendee or mortgagee be a partnership firm, then to a member thereof, a written statement, sworn to substantially as hereinafter provided, of:

a. The names and addresses of all creditors to whom said vendor or mortgagor may be indebted, together with

b. The amount of indebtedness due or owing, or to become due or owing by said vendor or mortgagor to each of said creditors

2. Pro-‐Rata Application of Proceeds (Section 4) – Applying the purchase or mortgage money of the said property to the pro rata payment of the bona fide claim or claims of the creditors of the vendor or mortgagor, as shown upon such sworn statement.

3. Written Advance Disclosure to Creditors (Section 5) — It shall be the duty of every vendor, transferor, mortgagor, or assignor:

a. At least ten days before the sale, transfer or execution of a mortgage upon any stock of goods, wares, merchandise, provisions or materials, in bulk, to make a full detailed inventory thereof and to preserve the same showing the quantity and, so far as is possible with the exercise of reasonable diligence, the cost price to the vendor, transferor, mortgagor or assignor of each article to be included in the sale, transfer or mortgage, and

b. Notify every creditor whose name and address is set forth in the verified statement of the vendor, transferor, mortgagor, or assignor, at least ten days before transferring possession thereof, personally or by registered mail, of the price, terms conditions of the sale, transfer, mortgage, or assignment.

4. Bulk Transfers for Nominal Value (Section 7) – It shall be unlawful for any person, firm or corporation, as owner of any stock of goods, wares, merchandise, provisions or materials, in bulk, to transfer title to the same without consideration or for a nominal consideration only.

IV. Consequences of Violation of the Law

• A sale in bulk done without complying with the terms of the Law, makes the transaction fraudulent and void, but does not change the basic relationship between the seller, assignor/encumbrancer and his creditor. The portion of a judgment providing for subsidiary liability is invalid, since the proper remedy of the creditor is to collect on the credit against the defendant, and if they cannot pay to attach on the property fraudulently mortgage since the same still pertain to the debtors-‐defendants. xPeople v. Mapoy, 73 Phil. 678 (1942).

• Section 11: Imprisonment of not less that 6 months, not more than 5 years, w/ fine not exceeding P5,000.

• We evaluate the effects of breaking the law from 3 different standpoints:

o On the transaction itself o On the seller o On the buyer

A. On the Transaction itself

1. If sworn listing of creditors is not prepared, or if the proceeds are not applied to them, the sale shall be fraudulent and void.

o This is not merely a presumption: it is in fact treated as void.



" No legal effects arise from the transaction " No right of action accrues

• Thus, the subject matter is still owned by the assignor, and still subject to the satisfaction of his liabilities

• People v. Mapoy, 73 Phil. 678 (1942) o Sale is void, but the relationship between seller and

creditor is unchanged. o Proper remedy of creditor is to collect on the credit

against the defendant, and if he cannot pay, to attach on the property fraudulently sold/mortgaged.

2. Failure to make an advanced written disclosure to creditors does not render the sale fraudulent and void.

• Legal consequences of a sale in Bulk for Nominal Value o Law declares it unlawful, but not fraudulent and void o However, if there was no other valuable consideration,

we have to declare it void for lack of cause or consideration.

B. On Seller/Mortgagor/Assignor

1. Criminal Liability • Violation of his obligations to prepare a list of creditors and

apply the proceeds of the sale to these creditors subjects him to criminal liability.

• If the list does not include all names of creditors, or with wrong amounts, it subjects him to criminal liability.

• To sell the stocks/goods/merchandise for no consideration, or for nominal consideration only, subject seller to criminal liability.

2. No Criminal Liability • Sworn statement should be registered with Department of

Trade and Industry. o Noncompliance with this does not affect validity nor

does it subject him to criminal penalty. • Failure to deliver advance notice does not subject him to

criminal liability. C. On Buyer/Mortgagee/Transferee

• No direct obligation. • It can be said that no criminal liability attaches to the buyers

o Some argue that they are principals by indispensable cooperation, if they were aware of the intent/conspired with the seller.

• There are still effects though since sale may be rendered fraudulent and void. Thus, he would find himself not entitled to the things he paid for.

o He may also be sued for recovery of what he has obtained.

o He may also be liable for damages for having helped defraud �creditors.

chapter 15. bulk sales law

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