Kentucky and Indiana Mechanic's Liens

Article 9 of Uniform Commercial Code

“Tips, Tricks & Traps”
The Legal Collection Process

Witness Preparation

Kentucky Collection Law Review

Indiana Collection Law Review

Commercial Collection Cases: Special Issues and Concerns

Effective Use of the Credit Application

Kentucky Collection Law Review

I. Actions

A. District court

Actions may be brought in the district courts of the Commonwealth of Kentucky for claims of less than $4,000.00 (exclusive of interest, attorney's fees, and court costs). Anticipated court costs for the typical collection case through post-judgment stage range from $85.00 to $120.00 depending upon the county in which the action is filed.

B. Circuit court

Actions for amounts in excess of $4,000.00 (exclusive of interest, attorney's fees, and court costs) must be brought in the circuit courts of the Commonwealth. Anticipated court costs through post-judgment stage are generally $150.00 to $180.00 depending upon the county in which the action is filed.

II. ATTACHMENT (PRE-JUDGMENT)
Pre-judgment attachment may be obtained in Kentucky against property of the defendant, including garnishees, as security for the satisfaction of any judgment that may ultimately be recovered. Generally, the grounds required relate to the fraudulent removal or disposal of property that would otherwise be available for satisfaction of any judgment ultimately rendered. Motions for attachment must be supported by a rather specific affidavit and require the posting of a bond (with corporate surety) with sufficient sureties for not less than twice the value of the plaintiff's claim. Although attachment can be obtained ex parte (without notice to the defendant), it is normally done with notice and the defendant has seven days to request a hearing.

III. ATTORNEY'S FEES
Provisions in any writing which create a debt obligating the debtor to pay reasonable attorney's fees in the event of default are enforceable to the extent said fees are paid or agreed to be paid, other than to salaried employees of the creditor. K.R.S. 411.195.

IV. EXECUTION
Ten days after the entry of judgment, execution may be issued against personal as well as real property pursuant to K.R.S. 426.010. Generally execution is more successful when the sheriff is given information regarding specific property to be levied against. Although encumbered property can technically be sold, prior lienholders must be included in any judicial sale and as a practical matter judgment creditors may risk substantial out-of-pocket costs associated with a sale in the event that insufficient proceeds are generated to satisfy prior secured or judgment lien creditors.

V. EXEMPTIONS
A. General Exemption - $1,000.00 (only in bankruptcy)
B. Homestead and Burial Plot - $5,000.00
C. Household and Furnishings - Household furnishings, jewelry, personal clothing, not to exceed $3,000.00 in value.
D. Insurance Benefits - Loan values, cash values, or proceeds, are completely exempt.
E. Motor Vehicle - One motor vehicle not exceeding $2,500.00 in value.
F. Tools - Tools not exceeding $300.00 in value necessary in the debtor's trade.
G. Wages - A judgment debtor is entitled to exempt the greater of seventy-five percent of his disposable earnings for the week or the amount by which his disposable earnings for that week exceeds thirty times the federal minimum hourly wage. (This restriction does not apply in the case of any court ordered support for any person, or any bankruptcy court order under Chapter 13, or for any debt due for state or federal tax.)
H. IRA accounts, pension, profit sharing, or other retirement plans are totally exempt, except contributions within 120 days before bankruptcy.

*Exemptions must be affirmatively pled by judgment debtor.

VI. FOREIGN JUDGMENTS
Kentucky has adopted the Uniform Enforcement of Judgment Act. Pursuant to K.R.S. 426.950 et seq., a copy of a foreign judgment authenticated in accordance with Act of Congress may be filed in any court of competent jurisdiction in the Commonwealth of Kentucky. Normal filing fees apply and by statute, execution cannot be issued upon said foreign judgment until twenty days after the date the judgment is filed. The judgment debtor is provided a copy of the filed foreign judgment by the clerk and is entitled to a stay of the judgment if the debtor can show the court any reason why said judgment should not be enforced.

VII. GARNISHMENT
Wage garnishment is recognized in Kentucky as provided for in K.R.S. 425.501. An order of garnishment, once served, shall have priority and create a lien upon the date of service. Garnishments are continuous and it is not necessary to issue subsequent orders for each pay period.

VIII. HUSBAND'S LIABILITY
Pursuant to K.R.S. 404.040, a husband shall be liable for necessaries furnished to his wife after her marriage. A husband generally is not responsible for any other debts contracted or incurred after marriage, unless he personally signs for the debt. Necessaries generally by case law have been limited to expenses incurred for reasonable health, maintenance, and welfare.

IX. INTEREST
The legal rate of interest in Kentucky is eight percent in the absence of a specific agreement for a higher rate. Without a provision in writing, pre-judgment interest is discretionary with the courts of Kentucky and may be allowed from the date the account is liquidated by demand or by rendering an account to the debtor thereby converting an open account transaction to an account stated transaction.

Charging more than the legal rate of interest (eight percent) may result in a forfeiture of all interest when knowingly done. In addition, the debtor may recover twice the amount of interest actually paid if an action is brought within two years of the date of the usurious transaction. Corporations, limited partnerships, and business trusts, may not plead usury as a defense.

Any person or party may agree in writing to a higher rate of interest than eight percent if the transaction is for an amount exceeding $15,000.00. In addition, if the amount is less than $15,000.00, any party may agree for a rate above eight percent, up to four percent in excess of the discount rate on a ninety day commercial note, or nineteen percent, whichever is less.

X. JUDGMENTS
Judgments in Kentucky have a fifteen year life once rendered. The judgment can be renewed by the issuance of executions thereon. The fifteen year statute of limitation upon judgments in Kentucky provides that the fifteen year limitation period is calculated from the date of issuance of the last execution.

Judgments represent a lien upon all real estate in which the judgment debtor has any ownership interest in the county in which the judgment creditor files a notice of judgment lien, all pursuant to K.R.S. 426.720. Judgments accrue interest at the rate of twelve percent compounded annually. However, judgments accruing interest on a written obligation bear interest according to the instrument whether higher or lower than twelve percent.

XI. MECHANIC'S LIENS
A. Owner occupied residential/new residential.

Owner occupied residential property or new residential construction, pursuant to a contract with persons who intend to utilize the property as a personal residence, requires a pre-lien notice within forty-five days of the date of last furnishing labor or materials. As with other private liens, the lien must be perfected by filing a statement in the office of the county clerk in the county in which the improved property is located within six months of the last date of furnishing labor or materials.

B. Private property (non-residential in nature).

Liens may be obtained in Kentucky by providing written notice to the title owner within seventy-five days (if the debt is less than $1,000.00), or one-hundred twenty days (if the debt exceeds $1,000.00) of the last date of furnishing labor or materials. In addition, to perfect the lien, a lien statement must be filed in the county clerk's office in the county in which the improved property is located within six months of the last date of furnishing labor or materials.

*Lienholders' interests are subject to the interest of bona fide purchasers including trustees in bankruptcy should the lien statement not be filed prior to sale or bankruptcy.

C. Public use property.

Liens cannot be obtained in Kentucky against publicly owned property. Generally a lien can be obtained against the fund due and owing to the contractor from the owner. The procedure requires filing a statement of lien within thirty days after the last date of furnishing labor or materials or supplies in the county clerk's office in the county in which the property is located or in which the seat of government of the owner of the property is located if the owner is a government entity whether at the state or local municipality level. Careful practitioners should probably file in both locations. In addition, to perfect the lien, an attested copy of the lien statement should be delivered to the public authority who owns or has made the contract, together with a copy of a letter addressed to the contractor or subcontractor showing that an attested copy of the lien statement has been sent by the claimant to the contractor or subcontractor certified or registered mail.

XII. LIMITATION OF ACTIONS
A. Open account.

Open account debts in Kentucky are subject to a five year statute of limitation pursuant to K.R.S. 413.120. However, pursuant to K.R.S. 355.2-725, there is a four year statute of limitations for breach of a contract for the sale of goods. Whether or not this means that an action for goods sold and delivered is subject to a four year statute remains subject to interpretation.

B. Written contracts.

Written contracts, including judgments, are subject to a fifteen year statute of limitation.

C. Personal property damage.

Actions relating to personal property, such as loss or injury to personal property as in subrogation actions, must be brought within two years from the time the cause of action accrued.

XIII. PROCEEDINGS SUPPLEMENTAL EXAMS
Pursuant to K.R.S. 426.381 and C.R. 69.03, a judgment creditor may obtain discovery from any person, including the judgment debtor, in aid of judgment or execution especially should it appear that the debtor is otherwise judgment proof or that further execution against personal or real property would be useless. Any property located in the possession of the debtor or other persons is subject to attachment as well as subject to being ordered by the court to be surrendered to the plaintiff. The court may use its contempt powers in enforcing surrender of property.

XIV. REPLEVIN
Pursuant to K.R.S. 425.011 et seq., a party at any time after filing of the complaint or any time prior to judgment may seek a writ of possession for specific personal property in instances where the plaintiff has a specific right of possession. A writ of possession is normally obtained through motion practice which must be supported by an affidavit. In addition, a bond (with corporate surety) must be posted for twice the value of the property to be replevied. Although replevin procedure may be done ex parte (without notice), it is normally done after having granted the defendant seven days notice to request a hearing. Replevin procedure differs from pre-judgment attachment procedure in that the plaintiff seeking a writ of possession normally has a specific interest in the property, such as instances where the creditor has perfected a security interest in the property.

XV. GUARANTIES
Guaranties are enforceable in Kentucky. However, any guaranties executed after July 31, 1990 (7/31/86 in the case of guaranties of negotiable instruments) to be enforced in the Commonwealth of Kentucky are subject to the provisions of K.R.S. 371.065. In pertinent part, the statute requires that any written guaranty which is either not written on, or does not expressly refer to, the instrument or instruments being guaranteed, shall be unenforceable unless in writing, signed by the guarantor, and containing provisions specifying (1) the maximum aggregate liability of the guarantor, as well as (2) the date on which the guaranty terminates. Termination shall not affect liability of the guarantor with respect to: (a) obligations created or incurred prior to the date, or (b) extensions or renewals of, interest accruing on or fees or cost expenses incurred with respect to, obligations on or after the date.

XVI. UCC FILINGS
Kentucky operates on a local as opposed to central filing system. Depending upon the type of collateral, UCC financing statements are usually filed in the county of the debtor's residence if the debtor is a resident of the state. If the debtor is a non-resident, then in the Office of the Secretary of State of the Commonwealth of Kentucky.

For an individual debtor, said debtor is deemed a resident of the county in which the debtor's principal place of business is located. If the debtor does not have a place of business in the state, then the debtor shall be deemed a non-resident for purposes of filing.

A partnership is deemed a resident of the county in which the principal place of business is located. If it does not have a principal place of business, then as with an individual it is deemed a non-resident of the state.

A domestic Kentucky corporation is deemed a resident of the county in which its registered office is located as set forth in its most recent corporate filings with the Secretary of State. A foreign corporation shall be deemed a resident of the county in which its registered office is located according to the information contained in its most recent corporate filing with the Secretary of State. A prudent creditor will file in several counties where there are several possible choices. This would include such instances as where the property is located in one county, the debtor's physical residence is located in another county, and the debtor's principal place of business is located in yet another county.

The duration of filing is five years from the date of the filing. The financing statement will lapse on the expiration of the five year period unless a continuation statement is filed within (but not prior to) six months prior to the expiration of the five year period.

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Prepared by James M. Lloyd, Lloyd & McDaniel, PLC, Louisville, Kentucky, Board Certified Creditor Rights Specialist, Commercial Law League of America, Academy of Commercial & Bankruptcy Specialist.

*"This information is designed to provide general information prepared by professionals in regard to subject matter covered. Although prepared by professionals, this publication should not be utilized as a substitute for professional service in specific situations. If legal advice or other expert assistance is required, the service of a professional should be sought."

COLLECTION CHRONOLOGY

The following represents the timing of events in the typical collection case where no response or defense to the suit is made.

Event Time Span

Suit filed Within 2 days of receipt of costs

Summons served normally within 14-28 days of filing suit

Alias summons served can be anywhere from 7 days to 60 days depending upon individual circumstances relating to problems of service

Filing for default 20 days after service of summons

Entry of default 14-28 days from filing *(unless court requires hearing which could add 30 additional days)

Issuance of execution
bank garn
wage garn
sheriff's levy
judgment lien filing** 10 days from entry of judgment

Return on execution:
bank garn
wage garn
sheriff's levy

28 days from service of garn on garnishee
28 days from service of garn on garnishee
90 days from issue date***

Proceedings supplemental anytime after 10 days of judgment entry; varies by county but generally can be requested every 90-180 days to examine debtor; time necessary to place upon the docket and obtain service of subpoena can be anywhere from 30 to 90 days

CONTESTED LITIGATION

Response to written discovery 30 days from date certified to opposing counsel

Motion to compel discovery 14 to 30 days to place upon the court's calendar

Obtaining trial dates varies from county to county but a minimum time frame is generally 6 to 12 months

* Some courts require hearings for entry of defaults.

** Judgment Liens encumber real property owned or acquired by the debtor during the life of the Judgment (15 years) in any county where recorded.

*** Sheriff's levies are generally ineffective without a list of unencumbered property. Sheriff will not perform a levy if an active bank garn is outstanding.