Imagine . . .
You’ve just completed a purchase of a friendly competitor’s overstocked inventory from the current season. She gave you a good price and will let you leave the goods at her warehouse for 30 days, just in time to pick them up for your end of season sale. She’s a little hungry right now; this isn’t her first bad stocking decision, and you’ve heard rumors she’s been stretching out her vendors.
You’re not worried about your purchase, though. You’re paying market for the inventory. Her bank’s consented to the transfer and released its lien. There aren’t any other liens. You don’t need to worry about her other creditors, right?
Because the transfer occurred at a time when she was in possession of the goods and the transfer was “not accompanied by an immediate delivery followed by an actual and continued change of possession of the property,” your purchase is void against her creditors at the time of transfer unless you’ve complied with the notice and filing provisions of California Civil Code Section 3440.1(h) or unless other provisions of Section 3440.1 exempt the transfer.
Civil Code Section 3440(a) provides that:
Except as otherwise provided in this chapter, every transfer of personal property made by a person having at the time the possession of the property, and not accompanied by an immediate delivery followed by an actual and continued change of possession of the property, is void as against the transferor’s creditors (secured or unsecured) at the time of the transfer and those who become creditors while the transferor remains in possession and the successors in interest of those creditors, and as against buyers from the transferor for value in good faith subsequent to the transfer.
“Creditor” is defined broadly at Section 3440(b), including, among others, anyone who holds a claim, as defined in the Uniform Fraudulent Transfer Act. The UFTA definition is itself broad, including not only fixed liabilities, but also contingent and other inchoate liabilities. A one-year statute of limitations is imposed by Section 3440.6, starting with the earliest of the date (i) the creditor, exercising reasonable diligence, should have known of the transfer, (ii) the date the creditor obtains actual knowledge of the transfer, or (iii) the date the property is delivered to the transferor.
As promised by the first words of the statute, there are exceptions, set out in Section 3440.1(a)-(m). Many of the exceptions recognize business realities – there are certain goods that aren’t expected to be delivered to the buyer immediately. For instance sales of wine held in wineries or standing timber are exempted by paragraphs (d) and (g), respectively. Sale-leaseback transactions – where the buyer never takes possession – are exempted by paragraph (k).
Other exemptions are provided to harmonize with other regulatory schemes. Paragraph (e) exempts assignments for the benefit of creditors, while paragraph (f) exempts property exempt from enforcement of a money judgment. Transfers of property subject to statutes or treaties providing for certificates of title are exempted by paragraph (j), provided that the transfer is perfected under such statute or treaty. Absent a purpose to evade the statute, goods located outside of California are exempted by paragraph (i).
Other exemptions include things in action, ships and cargoes at sea or in a foreign port, transfers of any property by governmental entities, certain utility property and the sale (but not other transfers) of accounts, chattel paper, payment intangibles, promissory notes, or security interests.
Probably most useful is the final exemption, provided at Section 3440.1(h), which exempts any personal property provided that the notice and filing requirements of that Section are complied with. Section 3440.1(h)(1) requires the filing of a financing statement in accordance with Chapter 5 of Article 9 of the UCC prior to the transfer. Section 3440.1(h) requires that a notice of the intended transfer, setting forth the names and addresses of the transferor and transferees, the location of the property to be transferred, the earliest date that the transfer may be made, and a general statement of the character of the property, be published at least ten days before the transfer one time in a newspaper of general circulation published in the judicial district in which the personal property is located, if there is one, and if there is none in the judicial district, then in a newspaper of general circulation in the county embracing the judicial district.
Where’s that again?
If you are relying on the exemption Section 3440.1(h) provides, it is critical that the filing and notice be free from defects. The content of both are clear from the text of the statute. Determining where to file is a relatively straightforward matter, governed by Article 9. Determining where to publish can be trickier. First point, it’s a state statute, so we are talking about state judicial districts. Second point, judicial districts in California can be unclear because of both the structure of California courts and the effects of Government Code Section 71042.5, which provides:
Notwithstanding any other provision of law, where judicial districts in a county have been consolidated, or where the municipal and superior courts in a county have unified, the territory embraced within the respective prior component judicial districts shall be separate judicial districts for the purpose of publication within a judicial district.
Nothing in the statute provides that later delivery of the transferred property will exempt the transfer. Late filing or late notice (under 3440.1(h)) will cut off the rights of creditors whose claims arose after the defects were remedied, but later delivery does nothing other than trigger the statute of limitations.