Kentucky and Indiana Mechanic's Liens

Article 9 of Uniform Commercial Code

“Tips, Tricks & Traps”
The Legal Collection Process

Witness Preparation

Indiana Collection Law Review

Kentucky Collection Law Review

Commercial Collection Cases: Special Issues and Concerns

Effective Use of the Credit Application

Article 9 of Uniform Commercial Code

I. Introduction

The Uniform Commercial Code (“UCC”) located at chapter 355 of the Kentucky Revised Statutes is the section of Kentucky law that covers business transactions. Article 9 of the UCC, which covers security interests, has recently been revised. The revised Article 9 makes broad changes in the filing and form requirements for perfection of security interests in collateral, as well as, adding new types of collateral in which security interests can be taken. The revisions which were approved by the National Conference of Commissioners on Uniform State Law were adopted by the Kentucky Legislature in its 2000 session and will go into effect on July 1, 2001. Thirty five states have adopted the revisions, including all states bordering Kentucky except Ohio and Missouri. As the revisions go into effect, creditors who file financing statements in several states will need to be aware of whether the state in which they wish to file has adopted Revised Article 9 to determine the appropriate place for filing and whether the new forms of collateral will be recognized in that particular state.

II. Changes in filing requirements for Financing Statements

A. Financing Statements

A copy of a financing statement is located at the first page of your appendix to this section. This model form has a revision date of July 29, 1998. It is important to remember that a creditor must use this form and not the form that was revised in 1995. Also, a financing statement is not the same as a title lien statement which will be discussed in detail below.

Revised Article 9 requires all financing statements to provide the following information:

Name and address of the debtor (For a corporation, it must be the legal name of the debtor as indicated in the records of the Secretary of State; a mere trade name is insufficient.);
Name and address of the secured party or representative of the secured party; and
Collateral covered by the financing statement. (May be a super generic description. “All assets” or “all personal property” is sufficient with some exceptions: commercial tort claims; consumer goods or other collateral taken in a consumer transaction; securities entitlements; securities accounts and commodity accounts. In addition, the security agreement must still include a specific description of the collateral.)

The debtor’s signature is no longer required on the financing statement if the filing of the statement is authorized by the debtor by a record that is authenticated. Authentication means a signed document, so if you have a security agreement, you have authority to file a financing statement. Indiana has not adopted this change, and the debtor’s signature is still required on the financing statement.

B. Filing Requirements of Financing Statements

Office of the Secretary of State
The major change in the filing requirements for financing statements under Revised Article 9 is in the location of the filing. Under current Kentucky law, in order for a financing statement to be valid, it had to be filed in the county where the debtor resides. However, under the Revised Article 9, all financing statements (with a few exceptions) must be filed with the Office of the Secretary of State.

This requirement is easy if the debtor is an individual, because you would file the financing statement in the state of the debtor’s principal place of residence. However, what if the debtor is a corporation, a registered organization? Then, the financing statement would be filed in the state of the corporation’s “original registration.” This is important to remember, because even if the corporation is doing all of its business in Kentucky, if it is incorporated in Delaware, then the financing statement must be filed with the Delaware Secretary of State.
1. Errors
  A financing statement that significantly complies with the requirements mentioned above will be effective even if there are minor errors, as long as, the financing statement is not substantially misleading.
2. Grounds for refusal
  The following are the only reasons that the Secretary of State may reject a financing statement:
  1. The statement is not given to the Secretary of State in a method allowed by that office;
  2. The name and address of the debtor are not provided;
  3. The fee is not enough;
  4. Additional debtor information that is needed for a clear understanding of who and what the debtor is, i.e. individual or corporation, if the debtor is an organization, what type is it and where it is organized;
  5. The secured party’s name and address are not included;
  6. Other than the initial financing statement, the statement does not include the file number; or
  7. The continuation statement is not filed during the six-month period prior to the lapse.
3. Filing Fees
  The filing fees vary depending on the method you are using to file the financing statement. They are as follows: $10.00 for written statements, $5.00 for electronic statements, $20.00 for written statements over two pages, $5.00 for certified search results and
  $ .10 per page for copies of UCC records. The obvious goal of this fee structure is to reduce “paper” filings.
4. Electronic Filing
  Electronic filing will be available on July 1, 2001. The Secretary of State website is www.sos.state.ky.us. There are two ways of filing statements electronically. They are XML records and Direct On-Line. The second technique is how most, if not all of you, will file your financing statements, which entails connecting to the Secretary of State website and completing the financing statement form. Then, you can charge the fee to a credit card or to a prepaid account that you can set up with the office. This account requires a minimum $250.00 initializing fee.
Exceptions to Central Filing Requirement
1. Collateral that is “tied to the land” will still be filed in the county in which the related real estate is located. Specifically, these include:
  1. fixtures;
  2. “as extracted collateral” i.e. coal, etc.;
  3. timber to be cut. However, be aware that once the timber is cut and moved, the perfection of the security interest will only continue if a financing statement is filed with the Secretary of State; and
2. Additional requirements.
  If the collateral is timber to be cut, collateral to be extracted or materials which will become a fixture, the financing statement must also include:
  1. A statement that it is covering this type of collateral;
  2. An indication that it is to be filed in the real property records;
  3. A description of the real property involved; and
    iv. If the debtor has no interest in the real property, the name of the owner of the property.
3. Title lien statements will still be filed in the county where the debtor resides.

III. Title Liens

A. Where to file

The title lien statement is still tendered to the county clerk in the county where the debtor resides. If the debtor is a corporation, then the lien statement is filed in the county of the corporation’s registered office. Revised Article 9 rules concerning the debtor’s location do not apply to title liens. These lien statements do not need to be filed at the Secretary of State in addition to the county filing. This change was effective July of 2000.

B. Time Period

The title lien use to have no expiration, however, under the new statute, these liens remain effective for seven (7) years from the date on which the security interest is noted on the certificate of title. The exception to this time period is a lien on a manufactured home, and then, the lien expires after fourteen (14) years. A secured party must file a continuation statement within six (6) months of the expiration of the initial period of the title lien. Also, a secured party must obtain certificate of title within twenty (20) days of execution of the security agreement giving the secured party a security interest in the collateral covered by the title lien. This enables the secured party to obtain a purchase money security interest and be assured of being listed on the title.

C. Fees

The fee for a county clerk to note the security interest on the title is increasing from $8.00 to $12.00. The other fees, i.e. $3.00 for state tax and $5.00 for an advanced release fee, remain the same. The total charge then for filing the title lien statement is $20.00.

IV. Transition Period

G. Existing Security Interests

The rules during the transition period only apply to existing security interests. A security interest that is perfected prior to the revised article, meaning the financing statement may be filed in the county of the debtor’s residence and not with the secretary of state, remains effective until the earlier of the remaining period of perfection under the old Article 9 or until June 30, 2006.

Example:

A secured party perfects a security interest in a debtor’s collateral on September 1, 2000 in the county where the debtor resides. The Revised Article 9 goes into effect July 1, 2001, requiring the above financing statement to be filed with the Secretary of State. The perfection of the security interest remains perfected until August 31, 2005, which would be the normal lapse time.

H. In Lieu Statements

To continue perfection of the prior filed security interest after July 1, 2001, you file an initial financing statement in lieu of filing a continuation statement and this statement is filed with the Secretary of State, unless one of the four exceptions apply to filing the statement in the debtor’s county of residence, as mentioned earlier. This initial statement is called the “in lieu” statement.

The “in lieu” statement continues the perfection of the prior filed financing statement for five years from the date of filing the “in lieu” statement, not five years from the normal lapse date of the original filing. The “in lieu” statement must:

Satisfy the revised Article 9 requirements for an initial financing statement (name, address and description of collateral);
Identify the prior filing by filing office, date of filing and file numbers; and
Indicate that the prior filing remains effective.

Example:

The secured party files a financing statement perfecting a security interest in collateral on September 1, 2000 in the county of the debtor’s residence. Revised Article 9 goes into effect July 1, 2001. The secured party decides to file an “in-lieu” statement with the Secretary of State on December 1, 2004. The security interest is perfected until December 1, 2009, which is five years from the filing date of the “in-lieu” statement.

If you are within your six month continuation period right now, file the continuation statement before July 1st, and you can avoid the revised Article 9 requirements until June 30, 2006. The filing will be in the same place as the original financing statement.

C. Perfection other than by Filing

Security interests that were perfected under the previous Article 9 but are not perfected under the new one, will remain perfected for a year after the Revised Article 9 takes effect.

Example:

A secured party has a security interest in a debtor’s right to proceeds under a written letter of credit. Perfection under the old article 9 was accomplished by possession of the letter, however, possession does not perfect the interest under the new article. The security interest will remain perfected until June 30, 2002.

V. New Types of Collateral

The revisions to Article 9 make more transactions, particularly those involving intangible collateral, subject to the provisions of the UCC. “Intangible collateral” refers to types of collateral other than goods. It includes: accounts, instruments, documents, chattel paper (a record of a security interest and a monetary obligation in collateral), investment property and general intangibles. Revised Article 9 applies to the sale of payment intangibles and promissory notes as well as to the traditional chattel paper and accounts.

A. Accounts

The definition of accounts is expanded to include monetary obligations for property “sold, leased, licensed assigned or otherwise disposed of.” This new, broader definition would cover royalty agreements and other intellectual property licensing agreements.

The definition of account also includes health care insurance receivables as a new type of collateral. This allows hospital and other care providers to borrow against their right to reimbursement from third party payors.

Lastly, deposit accounts are now included as collateral which can be secured under Revised Article 9. Under the current Article 9, deposit accounts are only viewed as collateral if identified proceeds from an Article 9 collateral transaction could be traced to an account. Now deposit accounts can be secured as original collateral. The only way for a secured party to perfect its interest in a deposit account is through control. This exists by where the party is the bank where the account is maintained; where the debtor, the bank and the secured party agree in an authenticated writing that the bank will abide by the secured party’s instructions; or where the secured party becomes the customer of the bank with respect to the account.

Under Revised Article 9, a transferee of funds or cash from a deposit account will take those funds free from the security interest, unless the transferee is acting in collusion with the debtor to violate the secured party’s rights. Also, a bank’s right to offset against a deposit account will be superior to a secured party’s interest to the account. Finally, a consumer transaction involving an assignment of a deposit account is excluded.

B. Promissory Notes

Promissory notes are now covered by Revised Article 9. However, they are granted automatic perfection under the article and are therefore exempt from the central filing requirements needed to secure other types of collateral.

C. Instruments

One major change under the new Article 9 is that it allows a secured party to file a financing statement to perfect its security interest in a negotiable instrument. A negotiable instrument is defined as “a writing that establishes a right to payment”. It is not a lease or a security agreement. Under the old article, the only way to perfect an interest in an instrument was through possession of the instrument.

VI. How Much Is Owed and What Is Your Collateral

Duty to Provide InformationUnder the new Article 9, a secured party is under a duty to provide information to the debtor, if the debtor makes a request. These types of requests can be:
1. a request for a statement of what is owed;
2. a request that the secured party approve a list of collateral that the debtor believes is covered by the transaction; and
3. a request that the secured party approve a statement showing what is owed.
Enforcement
A secured party must be very specific in its response to a debtor’s request as to how much is owed and what collateral is covered. These requests must be authenticated by the debtor, and other creditors may not submit requests. A secured creditor must comply with a request within 14 days after receipt. A secured party that does not comply with a request may claim an interest only in what is shown in the statement or list that was included in the request as against a person who is reasonably misled by the failure to respond. In addition, a debtor may recover damages for any loss caused by the secured party’s failure to respond, along with a statutory penalty of $500.
Miscellaneous
A buyer of chattel paper, promissory notes, payment intangibles, accounts or consignor is exempt from the duty to provide information. If the secured party no longer has an interest in the collateral contained in the debtor’s request, then he or she must disclaim any interest and provide the name and address of the party now claiming an interest, if the secured party has this information.

VII. Default and Enforcement Procedures

Part 6 of Revised Article 9, which governs default remedies, will be retroactive to all transaction involving a security interests, not just those involving security interests created after July 1, 2001.

Collecting the Collateral
A creditor may still repossess the collateral itself, as long as, no breach of the peace occurs. Revised Article 9 does not define breach of the peace, but the official comments to this section make clear that the assistance of law enforcement officers is still prohibited. However, the new article enhances some rights of the secured party as they apply to certain types of collateral.
1. Collection of a debtor’s accounts receivables
  If so agreed, after default, a secured creditor may take any of the following actions to enforce its security interest in accounts receivable:
  1. May notify an account debtor or other person obligated on the collateral to make payment or otherwise render performance to the secured creditor;
  2. May take the proceeds to which the secured party is entitled under Article 9; or
  3. May enforce the obligations of an account debtor or other person obligated on the collateral and exercise the rights of the debtor with respect to the obligation of the account debtor or other person obligated on the collateral to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor or other person obligated on the collateral.
2. Collection of Fixtures
  A creditor who has a security interest in both personal and real property may proceed against the personal property without prejudicing any rights to the real property.
  1. Removal of fixtures
    If a secured party having a security interest in the fixtures has priority over all owners and encumbrancers of the real property, the secured party may remove the fixtures.
  2. Injury caused by removal
    Once collateral is removed, the secured party must “promptly” reimburse any other emcumbrancer or owner of the property other than the debtor for the costs of repair of the physical damage to the real property. The secured party is not liable to the other interest holders for any reduction in the property’s value by removal of the fixtures or for the costs of replacement. A person entitled to such reimbursement may refuse permission to allow removal until the secured party gives adequate assurance for the performance of the obligation to reimburse.
3. Collection of Deposit Accounts
  If a secured party has an interest in a deposit account perfected by control, the party may apply the balance to the obligation secured by the deposit account or instruct the bank to pay the balance of the deposit account to the secured party.
Liquidating the Collateral
1. In Full Satisfaction of the Debt
  Under Revised Article 9, a secured party may still choose to accept its collateral in lieu of the debt if it is unlikely that a deficiency claim can be collected or if attempting to collect a deficiency claim would result in excessive legal expense or risk. Also, the debtor must give its consent.
  The following are exceptions to accepting the collateral in lieu of the debt:
  1. The debtor, any secondary obligor or any other secured party objects within 20 days of notification;
  2. Certain consumer collateral cases where 60% of the cash price or the principal amount of the obligation has been paid; or
  3. The collateral was in the possession of the debtor at the time the consent was given and the collateral involves consumer goods.
2. In Partial Satisfaction of the Debt
  1. Unlike the current law, Revised Article 9 allows acceptance of the collateral in partial satisfaction of a commercial debt. The secured party will be responsible for searches in both the county and with the Secretary of State to assure that all secured parties are properly notified. The procedural requirements are as follows:
    1. The debtor and all other secured parties must consent after default in an authenticated record;
    2. The secured party sends a proposal to the debtor, other secured parties or obligors and either everyone consents or the secured party does not receive an objection from the party within 20 days; and
    3. The proposal must be made in good faith;
  2. If the proposal has been accepted, then the secured party’s acceptance of the collateral:
    1. discharges the debt to the extent agreed upon by the debtor;
    2. transfers all of the debtor’s rights in the collateral to the secured party; and
    3. discharges any subordinate security interest.
3. Time Frame for Liquidation
  As a general rule, collateral must be liquidated within a commercially reasonable period of time. However, for consumer goods where 60% of the cash price or principal balance of the obligation has been paid, a secured party must liquidate within 90 days of taking possession of the collateral, unless the debtor and all secondary obligors have consented to extend this period by entering into and authenticating an agreement after default.
4. Notice of Sale
  Revised Article 9 differentiates between commercial and consumer cases in its requirements for sending notice of disposition. The new provisions are located at KRS 355.9-611.
  1. In consumer goods cases, the creditor must notify the debtor, as well as, any secondary obligor (the guarantor or co-maker).
  2. In cases other than consumer goods, the creditor must notify:
    1. Any person from which you have received an authenticated notification of a claim of an interest in the collateral;
    2. Any other secured party that 10 days before the date of the notice of sale has properly perfected a security interest in the collateral by filing a financing statement reasonably identifying the collateral and indexed under the debtor’s name in the proper office; and
    3. Any other secured party that 10 days before the date of the notice of sale had a security interest perfected under other state or federal statute.
  3. Exceptions to notification:
    1. The collateral is perishable, or threatens to decline speedily in value or is of a type customarily sold in a recognized market;
    2. Other secured parties have not responded in a timely manner to request for confirmation of their security interest; or
    3. A waiver of notice has been signed by the party after the default;
  4. When Must a Notice of Sale Be Sent
    1. In consumer cases, there is no firm time period, it is a question of fact;
    2. In commercial cases, notice must be sent 10 days prior to the sale;
  5. Content of Notice of Sale
    1. Notices of sale in both consumer and commercial goods transactions must contain the following:
      1. Description of the debtor and the secured party;
      2. Description of the collateral;
      3. Method of disposition;
      4. Statement that the debtor is entitled to an accounting of the debt and what is to be charged for such an accounting; and
      5. Time and place of a public disposition or the time after which any other disposition is to be made.
    2. Consumer goods notices of disposition must also include:
      1. A description of any liability for a deficiency owed by the person;
      2. A telephone number from which the amount needed to redeem the collateral is available; and
      3. A telephone number or mailing address from which additional information as to the sale and debt is available.
5. Commercially Reasonable Sale
  A sale of collateral is commercially reasonable under Revised Article 9 if it is made:
  1. In the usual manner on any recognized market;
  2. At the current price in any recognized market at the time of disposition;
  3. Otherwise in conformity with reasonable commercial practices among dealers in the type of property that is to be sold;
  4. Has been approved in a judicial proceeding or by a creditors’ committee or representative of creditors; or
  5. In non-consumer cases, the creditor must also notify any other parties claiming a security interest in the collateral.
  Article 9 also codifies the “rebuttable presumption rule” for commercial cases. If a creditor fails to comply with any required sale procedure (other than failure to provide notice of sale) it is presumed that the collateral is equal to the unpaid balance of the debt. However, the creditor can challenge this presumption by proving that the error did not harm the debtor or obligor and that the creditor is entitled to recover the deficiency balance. Failure to give notice of sale still operates as an absolute bar to pursuing a deficiency action in consumer cases but probably does not in commercial cases.
6. Deficiency Notice
  In consumer goods transactions, if a deficiency balance remains after the disposition of the collateral, a secured party is required to send the debtor a notice of the deficiency balance.
  1. a. Requirements of a Deficiency Notice
    The following information must be included on the deficiency notice before or when the secured party accounts to the debtor and pays any surplus or makes first written demand for deficiency or within 14 days of receipt of request by an obligor. It must be provided in the following order:
    1. The aggregate amount of obligations secured by collateral must be provided to the debtor. Unearned interest and service charges must be indicated;
    2. The amount of the proceeds of the disposition;
    3. The aggregate amount of amount of the obligations after deducting the amount of the proceeds;
    4. The amount and type of expenses incurred in the retaking and disposition of the collateral and attorney’s fees secured by the collateral which are known to the secured party and relate to the disposition;
    5. The amount and types of credits to which the obligor is entitled not reflected in the above aggregate amount; and
    6. The amount of the surplus or the deficiency.
7. Termination
  For consumer goods, a termination statement must be filed when there is no obligation secured by collateral and no commitment to an additional obligation. The termination notice must be filed 20 days after an authenticated demand from the debtor or within one (1) month from there being no secured obligation. For a non-consumer goods transaction, a termination notice must be filed within 20 days after receiving a request from debtor or it can be sent to debtor within that 20 days for the debtor to file. For security interests filed prior to July 1, 2001 in the office of the county clerk, the termination statement must be filed in that office. If the original or an additional financing statement was filed with the Secretary of State, a termination statement must be filed there.

* This information is designed to provide general information prepared by professionals in regard tot he 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 services of a professional should be sought.